Green Lights for Investors

04/20/2009 11:04 am EST

Focus: MARKETS

David Fried

Editor, The Buyback Letter

David Fried, editor of The Buyback Letter, says his market indicators give positive signals for investors—although it’s not the first time.

We add the total bullish percentage readings of Investors Intelligence, Consensus Index, AAII Index, and Market Vane and average this figure for the month. Sentiment registered an average reading of 117.20 for the month of March 2009, a positive reading.

Additionally, the last reading of the month was 109. That is as low as the readings were after the 9/11 terrorist attacks. We are now in the November—April time period (historically the May-October time frame has underperformed the November—April period).

Our sentiment indicator is an inverse indicator, so the lower the score is, the higher the reading. An average reading of more than 200 is considered negative and warrants a cautious approach. Readings of 240 or more have signaled market highs over the past few years, while readings of 130 or so have shown market lows for the past few years.

Underneath the market noise are “Big Trends”—solid realities that ultimately rule the day.

Big Trend #1: Inflation. Since 1920, the Standard & Poor’s 500 index has gone up an average of over 10% when inflation was 2%-5%. Currently, inflation is running below [1% or is even negative—Editor]. The inflation trend remains very positive.

Big Trend #2: Long-term bond yield. [According to Peter Lynch,] when yields on long-term government bonds exceed the yield on the S&P 500 by 6% or more, sell stocks and buy bonds. The current difference between the two yields is 0.9%.

Big Trend #3: Federal Reserve. The Fed cut rates significantly and is now on hold, [but] is using other, additional, measures to stimulate the economy.

Big Trend # 4: Yield curve. [Recently] the 30-year bond yielded 3.50%, 2.635% more than the two-year notepaper. The spread between two-year paper and the ten-year bond is 1.875%. The yield curve spread is in order.

Big Trend # 5: Valuation. The decrease in the market so far this year did not decrease the P/E ratio of the S&P 500 as earnings have estimates have fallen as well. The S&P 500 trades at about 18x earnings—[which] includes depressed earnings in the real estate and bank sectors. The wild card is will earnings be close to what is expected in 2009?

Big Trend #7: Money supply. The broadest measure of money supply available is called M2, [which] is up about 8.4% from the same time last year (end of January reading). An expanding money supply is bullish for equities, and this is a major expansion.

Six of our seven indicators are positive, and one (Valuation) is neutral. None of our indicators are negative, and that is now the fifth time this has happened!

Our indicators are telling us the investment climate is positive at this time. (However, in all fairness we must mention that it began showing this reading at the beginning of 2007.)

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