JUNE, 2011: I no longer maintain the Timing Outlook. This page has been retained

for individuals who are interested in reading more about the Timing Outlook as

described in my book, SENSIBLE STOCK INVESTING.

The Timing Outlook described in SENSIBLE STOCK INVESTING has been changed,

because some of the component indicators used in the original are no longer

available. They have been replaced by other trend indicators.

This page is designed to introduce newcomers to the Timing Outlook and also to

explain the changes to readers of the book.

Q: What is the Timing Outlook?

A: The Timing Outlook is a short-term indicator of the likely direction of the stock market over

the next several weeks.

Q: Where did the Timing Outlook originate?

A: I created the Timing Outlook in my book, SENSIBLE STOCK INVESTING. It was a natural

outcome of my research and analysis in the book about factors that affect stock prices.

Q: Does the Timing Outlook work?

A: It is certainly not infallible. No timing system is right 100% of the time. In SENSIBLE STOCK

INVESTING, it is presented as just one of several tools to help the investor make better buy,

hold, and sell decisions.

Many stock authorities eschew market timing, stating that it is impossible, and that it more

often than not leads investors to make flawed decisions.

In my opinion, market timing can be useful, especially in helping avoid catastrophic losses. In

2008, for example, my Timing Outlook influenced me to keep most of the money in my Capital

Gains Portfolio in cash rather than in the market. That was a hugely successful decision, as

the stock market suffered a horrific crash. In 2009, the Timing Outlook influenced me to re-

enter the market as it was starting up from its march, 2009 low point.

If as an investor you believe that market timing is impossible or stupid, simply ignore it. The

other sound principles of being a Sensible Stock Investor still apply.

Q: What are the elements of the Timing Outlook?

A: The Timing Outlook is relatively simple. It utilizes several factors that are readily available

for free to the average individual investor. These are the factors:

Economic forecast . Over time, stock prices follow corporate earnings. Corporate

earnings, in turn, often depend on how the overall economy is doing. I use the widely

reported Conference Board Index of Leading Economic Indicators for this purpose.

Interest rate .. Generally, falling interest rates are good for the stock market and rising

interests rates are not. I use a simple indicator based on the Federal Reserve’s widely

publicized Fed Funds Rate.

Market v aluation . Low market valuations usually portend market rises, while high

valuations suggest the opposite. I use two valuation indicators: (1) The P/E ratio of the

S&P 500 compared to its own historical average. (2) Morningstar’s free Market

Valuation Graph.

Market t rends. Many investors believe that once a clear market trend has been

established, it tends to continue until something causes it to change. Using the most

basic of technical analysis techniques, I monitor six market trends, two each for the

Dow Jones Industrial Average, the S&P 500, and the NASDAQ.

Details about the specific factors used in the Timing Outlook, and how they are used to

calculate the Timing Outlook, are explained in the last two questions of this FAQ.

Q: How often do you recalculate the Timing Outlook?

A: Generally every two weeks. The Timing Outlook is not meant for extremely rapid trading

decisions—day trading and the like. Rather, it is meant to improve the buy, hold, and sell

decisions of investors who have a longer-term outlook. In particular, it is meant to help

investors get their new purchases off to good starts, and to help them avoid losses that might

result from purchasing, selling, or failing to sell at the wrong times.

Q: Is the Timing Outlook available precalculated, so I don’t have to do it myself?

A: Yes. I include an updated Timing Outlook, with appropriate market commentary, in my free

Newsletter. Use the button to the right to sign up for the Newsletter. You will find the latest

Timing Outlook if you go directly to the Newsletter.

Q: How is the Timing Outlook calculated?

Q: What are the specific components of the Timing Outlook, and how is each of

them evaluated?

A: Here is a brief description of each of the 10 individual components and how it is evaluated:

1. Economic indicator. Conference Board Index of Leading Economic

Indicators. The evaluation here is not so much concerned with th e Leading Index’s

value as with its direction. The Leading Index is calculated once per month, and it is

widely reported in the media and on the Conference Board’s Web site. Interpretation:

Rises for three straight months: Positive. + 10 points.

Falls for three straight months: Negative: + 0 points.

Neither of the above: Neutral: +5 points.

2. Interest rate indicator: Fed Funds rate. I consider a rate around 4% as neutral.

If the Fed Funds rate is m uch lower than that, or if the Fed is actively lowering interest

Any other condition: Neutral: + 5 points.

3 & 4. Market valuation indicators: I use two indicators. the P/E ratio of the S&P 500

compared to its own historical average ; and the Morningstar Market Valuation Graph

S&P 500 P/E ratio. I have recalibrated the S&Ps average P/E to add 2010 data

from the S&P website. The average P/E based on operating earnings over the

period 1988 to 2010 was 19.2. Any value within +/- 10% of that is considered

neutral. Thus the neutral range is 17.3 21.1. Any value below neutral is

considered positive, any value above neutral is considered negative. ( B ook

readers, note that the new average is lower than the value of 20 used in the

book. ) I have create d three bands by adding and subtracting 10% from the

long-term average to allow room for normal market volatility and noise.

Interpretation.

P/E < 1 7 .3. Positive: + 10 points.

P/E > 21. 1. Negative: + 0 points.

Any other condition: Neutral: +5 points.

Morningstar Market Valuation Graph: Morningstar creates a ratio that

compares the price s of the 2000-or-so stocks that they cover to the fair value s

that they calculate for each of those stocks. A ratio of 1.0 means that, on

average, Morningstar feels that stocks are fairly valued. Again, I create bands by

allowing a variance of 10% in either direction. Interpretation:

Ratio < 0.9: Positive: + 10 points.

Ratio > 1.1: Negative: + 0 points.

Any other condition: Neutral: + 5 points.

5 through 10. Market trend indicators. I use six simple trend-following technical

indicators, two each for the Dow, the NASDAQ, and the S&P 500. The two indicators for

each index are (a) a very-short-term indicator (using the 20-day and 50-day simple

moving averages, or SMAs), and (b) a longer indicator (using the 50-day and 200-day

SMAs).

The calculations for all six are identical and straightforward:

If the index is above the shorter SMA, which is itself above the longer SMA, that

is considered a confirmed upward trend. Interpretation: Positive: +10 points.

An example makes this indicator easy to understand. If the actual value of the S&P 500

is above its 50-day SMA, that means the index is leading or pulling the 50-day SMA

upward. And if the 50- day SMA is also higher than the 200-day, that means the index’s

value has been generally trending upward for quite a long time (200 trading days is

the equivalent of 40 weeks). A glance at a chart of the index, with the two SMAs

superimposed, would show that at some point, the shorter SMA passed up through

the longer SMA, creating what is known as a golden cross. So the implication from

that situation (actual > 50-day > 200-day) is that the index is in a long- term uptrend.