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Dow Theory for the 21St Century Schannep Timing Indicator COMPOSITE Indicator a Tale of Two…Possible Outcomes

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Dow Theory for the 21St Century Schannep Timing Indicator COMPOSITE Indicator a Tale of Two…Possible Outcomes st June 1 , 2013 Dow Theory for the 21st Century Schannep Timing Indicator COMPOSITE Indicator A Tale of Two…Possible Outcomes Overview: Even as the Bull market rages, there are always things to worry Dow Jones: 15,115.57 about. The declining trend in Retail Sales Growth is one of them. Two of the S&P 500: 1,630.74 last three previous ‘obvious’ declines have fallen to below a 2% growth rate NYSE: 9,302.27 and when they did the economy entered into recession. In 1995 the declining growth rate did not continue and was able to stabilize above 2% and avoid recession. Today’s report, however, showed consumer spending dropped to a negative -0.2% for April, not a good sign. The year- over-year change was about 2.8%. We’ll keep our eyes on this important economic indicator: The reasons for this recent decline in sales are numerous. For the bottom 60% of wage earners, which accounts for 40% of all consumer spending, some of those issues could be the increase in Payroll and Social Security taxes and/or late federal tax refunds due to the sequester, or inefficiency, or whatever. For the high-end consumers, accounting for 60% of all consumer spending, they may have their own issues: a reinstated top marginal tax rate of 39.6%, rising Medicare tax, the allowable itemized Flexible For more information, contact [email protected]. All logos, trademarks, and content used in this newsletter are registered trademarks and/or copyright of their respective companies and owners. 1 st June 1 , 2013 spending health-care accounts reduced by half, and the top rate on long-term capital gains and dividends rose from 15% to 20%. The offset to Retail Sales growth of 2% or less is a growing Consumer Confidence, and this week’s report beating expectations and hitting a 5 year high, is encouraging because some 70% of economic activity is attributed to the American consumer. A glance at the Special Report on Consumer Confidence shows that, despite this month’s increase, the level of Confidence is still 1/3rd lower than the average at previous peaks in confidence. That shows on the one hand a somewhat depressed consumer, and on the other hand, room to improve. Which will prevail? Usually you can count on the American consumer to return to his/her shopping habits and boost retail sales growth, but this certainly bears watching: The chart below shows that Revenue/sales growth for the S&P 500 has been slowing to a halt while earnings have continued to grow (actually this chart appears to overstate earnings growth as the year- over-year change of after-tax corporate profits is but 4%). Since the last recession ended in 2009, the S&P500’s operating earnings (the sum of the companies “bottom lines”) have risen almost 100% from about $65 to almost $115, while revenue (company “top lines”) has increased only about 26% from just a little over $910 to a little shy of $1,150 per share, according to the latest chart book from Yardeni Research. For more information, contact [email protected]. All logos, trademarks, and content used in this newsletter are registered trademarks and/or copyright of their respective companies and owners. 2 st June 1 , 2013 Why are earnings holding up, but revenues aren't? Companies have managed their bottom lines very efficiently, achieved through such things as: Worker productivity remaining high, eliminating the need to hire more employees Costs have fallen, such as energy – particularly natural gas Technology is helping to maximize efficiency Deleveraging has certainly reduced debt service costs Tax savings, utilizing tax-loss carry-forward, etc The top line is much harder to manage and more transparent - a lot more difficult to hide troubles. This is what will need to be watched closely in coming months – evidence of growth. The question is: Can earnings continue to grow without sales growth? For more information, contact [email protected]. All logos, trademarks, and content used in this newsletter are registered trademarks and/or copyright of their respective companies and owners. 3 st June 1 , 2013 Due to the bull market, the S&P price level is back up to its historic Price to Sales Ratio which doesn’t leave much room for the S&P500 to increase unless revenues/sales begin to rise: On top of earnings growth, the price to earnings (P/E) ratio has been growing incrementally, as shown below, which of course translates into higher stock prices: Chart compliments Bespokeinvest.com For more information, contact [email protected]. All logos, trademarks, and content used in this newsletter are registered trademarks and/or copyright of their respective companies and owners. 4 st June 1 , 2013 To summarize the above charts: Revenues are growing very slowly and yet Earnings continue to grow. While that can continue for awhile it likely is not sustainable. On top of that, the Price to Earnings ratio is growing even faster, an even less sustainable situation. The last time the P/E got much higher than currently, the market topped out. Notice that the Wall Street Journal shows the current P/E at 19.24 v. 14.85 a year ago. Adding to that, the price to sales ratio is back to “normal”; only an overpricing (or sales growth resuming) can cause the market to lift further. Since we are not expecting a recession soon, but continue to appraise the possibilities, there is every likelihood that the next correction/setback will be caused by the market having moved too fast for its own good, rather than in anticipation of the next recession. You’ll recall that the current ‘Measured Move” points to 16,000 later this year, and here we are not yet at mid-year with only a further 3.8% to go. While that gain is certainly attainable, it would not be surprising to see a similar 3-4% setback along the way. More on our new Website: One of the best improvements to our newly redesigned website is the ability to search. In today’s Letter we discuss Retail Sales as we have done previously, but when was that and why? If you’ll enter “retail sales” (the quotation marks will narrow the search to just those two words used together) you’ll find that we discussed retail sales in three Letters last year, twice in 2011, once each in 2010 and 2008. So anytime you want to review a subject and perhaps what happened afterwards just use the ‘search’ capability, it sure beats thumbing through a bunch of past Letters. Jack Schannep for the Schannep Team The DOW THEORY for the 21st Century: No change here - This Indicator signal is in a BUY mode (GREEN) at 13,412.55 from the January 2nd, 2013 signal. As you know from our May 6th e-mail the Dow Jones Transportation average made new all-time highs joining the Industrials and the S&P500 at their new all-time highs, a trend that continued through May 17th and we referred to as "In the Clear”. The Original DOW THEORY got a Buy signal on January 18th at 13,649.70. Neither is in jeopardy of changing in the immediate future. Schannep TIMING ↓INDICATOR: No change here either - This Indicator’s signal has been in BUY mode (GREEN) with an average entry level of 11,746.50 from the time of the last Capitulation Indicator Buy signal on August 8th, 2011 at 10,809.85 to the completion to 100% invested on October 27th, 2011 at 12208.55. Both the momentum and monetary parts of this Indicator continue in a ‘Positive’ status, with neither hinting at any change. For more information, contact [email protected]. All logos, trademarks, and content used in this newsletter are registered trademarks and/or copyright of their respective companies and owners. 5 st June 1 , 2013 The COMPOSITE Timing Indicator: No change - This Indicator is in a BUY mode (GREEN) since January 2nd, 2013 at an average level of 12,579.52 (half from the Schannep Timing Indicator’s Buys at 11746.50 and half from the Dow Theory for the 21st Century’s Buy at 13412.55). While we feel that our interpretation of the Dow Theory and the Schannep Timing Indicator are the two premier major-trend market timing indicators with proven long-term records, neither is perfect. In an effort to have the best of both worlds we have combined them into this Indicator, which we use with our real-money portfolio shown at the end of each of these Letters. Last week the Market Technicians Association interviewed me as a part of their “Conversations” series of Podcasts which they maintain in their free, five year (and counting) archives of such interviews (under ‘Member Services” at MTA.org). We have included it on our website under “Resources” dropdown “Webinars”. It lasts 20 minutes and you can hear it HERE. → The BOTTOM LINE: It is at times like these when a Letter like ours may seem unneeded. The markets are hitting all-time highs, our indicators are all BULLISH mode GREEN and with no change in sight. Anyone can make money in this market, right? Well yes, but… like the game of musical chairs, as long as the music is playing it is all fun and games. It is when the music stops that people get hurt. This letter’s purpose is to show the major-trend of the major-market and when the changes. If we can repeat our success in ‘calling the top’ from 2007 when the next time comes, we would hope to help our Subscribers keep their assets intact when the music is stopping.
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