June 7, 2012

Stock Market Crash Course: Oversold Rally or New Bull Market?

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Written By Chloe Lutts Jensen

“In today’s Stock Market Crash Course, we hear from Dan Sullivan, Marvin and Gerald Appel, Richard Rhodes and John Gray. They look at the market’s action relative to its 200-day moving average to give some important levels to watch.”

Chloe Lutts, Editor of Dick Davis Investment Digest and Dick Davis Dividend Digest

Chloe Lutts is the editor of Dick Davis Investment Digest and Dick Davis Dividend Digest, and the third generation of the Lutts family to join the family business. For each Digest, Chloe reads hundreds of investment newsletters to select the strongest ideas for her readers. Prior to joining the Dick Davis Digests, Chloe was a financial reporter for Debtwire, a division of the Financial Times, covering fixed income, and before that, she reported on global debt markets for Institutional Investor. She also has previous experience at Cabot, writing about growing momentum stocks for Cabot Top Ten Trader and high-potential small companies for Cabot Small-Cap Confidential. She holds a B.A. in International Relations from Brown University, and also studied in Beijing and Paris.

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10 Blue-Chip Dividend Payers to Own in 2012

Dear Investor,

A recent survey of our subscribers revealed that their greatest investing concerns are market volatility, economic uncertainty and maximizing dividend income.

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There are a lot of fixed-income investments for investors to choose from: bonds and preferred stocks offer investors varying levels of security on corporate debt. There are always a few alternative income investments in every issue of Dividend Digest, but dividend-paying stocks are our main focus. And for all but the most conservative investors (those who really can’t afford to risk any capital, ever), dividend-paying stocks are a great way to generate income right now.

John Buckingham, one of our Dick Davis Dividend Digest contributors and editor of The Prudent Speculator, brilliantly explained the advantages of dividend payers in the latest Dividend Digest:

“Clearly, equity investors must steel their nerves for heightened levels of volatility, especially as the European sovereign debt crisis remains front and center, growth in stronger economies like China and Germany has slowed and recent economic statistics in the U.S. have been far from robust, but relative to Treasuries, dividend yields are as attractive as they’ve been in 50 years. Aside from several months at the height of 2008-2009 Global Financial Crisis, the last time the yield on the S&P 500 was above the yield on the 10-year Treasury was 1958. And the big plunge in both interest rates and equity prices on October 3 moved the forward yield on the S&P closer to the 2.8% yield on the 30-year Treasury! What’s more, corporations have actually been boosting their payouts as more than half (258) of the S&P 500 members have either raised or initiated a dividend this year.”

He continued, “It is nice to see the renewed interest in income, as we can’t forget that dividends and their reinvestment have long been a substantial contributor to the total return on equities. Data from Morningstar going back to 1927 show that through the end of last year, the income component of total return amounted to 41% for Large-Cap Stocks, 35% for Mid-Cap Stocks and 31% for Low-Cap Stocks. More importantly, our own analytical work going back 20 years and numbers we’ve crunched from Eugene T. Fama and Kenneth R. French dating to 1927 find that dividend payers have actually outperformed non-dividend payers over the long term and they have done so with lower volatility! Not quite the Holy Grail, but higher returns with lower risk is obviously a winning combination.”

It’s hard to argue with that.

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Wishing you success in your investing and beyond,

Chloe Lutts

Editor of Dick Davis Dividend Digest

P.S. Dividend-paying stocks have outperformed non-dividend-paying stocks by four to one over the past 35 years. The New York Times goes so far as to say that “without dividends, you would lose money investing in blue chips.” Don’t miss my new special report detailing 10 of the very best dividend-payers you need to own in 2012. Jump-start your portfolio today!

The market has had several strong days since June 4, when it made this V-shaped bottom that could be a one-day reversal pattern.

Dan Sullivan, The Chartist:

“Stocks were due for a technical bounce but whether they have turned the corner remains to be seen.”

June 5, Marvin and Gerald Appel, Systems & Forecasts:

“Last week’s sell-off brought the S&P 500 Index below its 200-day moving average. … During the market corrections of 2010 and 2011, the S&P had more downside after crossing below the moving average. It is rare, historically, for the S&P to stop falling right at the moving average. … History suggests that even in strong market climates, which this is not, the ultimate low for the correction lies at least 2% below the 200-day moving average even in the best case, and of course much lower in a bad case. I view the market’s current prospects as neutral, and therefore expect the S&P to touch 1250 in June, but not to get below 1200 at the low point of the spring-summer correction.”

Richard Rhodes, The Rhodes Report, June 7 (Thursday AM):

“The decline was material into major support at the 200-dma at 1278; with this zone ultimately holding — and in the process — ingraining Monday’s low at 1266 as the bulls’ “Maginot Line” or “line in the sand” that must be defended or sharply lower prices are ahead.”

He still thinks any rally will be brief, but writes:

“But yesterday’s rally was really rather impressive, with A/D (advance/decline) and volume figures showing surprising strength. This would indicate the possibility that something larger than a countertrend rally may be getting underway. One day a move doesn’t make, but it’s raised our antennae given our models are at or near oversold levels. … The key upside level to overcome is 1344.”

John Gray, Investor’s Intel, Thursday AM:

“The strong Wednesday action provided new indications that markets are beginning a trading rally. We now see confirming reversals up on nearly all short term indicator charts, from low levels last week. Averages also turned higher after the primary index declines all held at/above technical support. Medium term indicators are also turning back to the upside suggesting a trading bottom is in place.

“Rallies are never vertical, without interruption, so the path higher could certainly include pauses. A new strategy of accumulation is in order though. The current projections are modest with a 50% recovery of the more that 10% correction the first target. How the markets act there will determine the next path. If we do see increasing stock breakouts we may get a real summer rally.”

That 50% recovery of the correction would bring the S&P back up to around 1345, which is interestingly the same level Richard Rhodes mentioned as a key upside level to overcome.