August 3, 2012

Stock Market Crash Course: Divergences

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Written By Chloe Lutts Jensen

In this edition of Stock Market Crash Course, the experts weigh in on the market’s reactions to earnings season, the European Central Bank announcement and the Knight Capital mishap. We hear from Clif Droke, Stephen Leeb, Richard Moroney and Bryan, Ronald and Michael Sadoff.

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.

As more and more Americans approach retirement age, and lose other regular income streams, I expect to see the last concern pop up more frequently. Fortunately, unlike market volatility and economic uncertainty, making your portfolio generate regular income is entirely within your control. And since it’s the focus of our Dick Davis Dividend Digest, I can help you.

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.

In fact, I feel so strongly about the benefit of owning dividend-paying stocks that I published a brand new report highlighting 10 of the best income-generating stocks that should be in your portfolio.

In 10 Blue-Chip Dividend Payers to Own in 2012, you’ll gain access to the top dividend-payers that can bring you steady, secure income.

And you can get it FREE when you subscribe to Dick Davis Dividend Digest today. Learn more now!

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!

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[Transcript]

Stephen Leeb, Cash Cow, July 31:

“Don’t look now, but the market is climbing another wall of worry. Up over 13,000 in the Dow Jones Industrial Average and an 11% gain year-to-date in the S&P 500. The whole ‘wall of worry’ thing is admittedly a peculiar Wall Street tendency, but a very entrenched one nonetheless. …

“The current earnings season is a perfect illustration of what we mean. By almost all measures, second-quarter results have been less than stellar. With the majority of the S&P 500 reporting through yesterday, it seems companies have largely met or slightly exceeded earnings estimates (which is good but prone to various manipulations) but largely missed or disappointed on revenues (which is bad since this is business coming through the door and much harder to game for a quarter or two, although not impossible).

“Being just as susceptible to the current environment as investors, company CEOs have been busily paring back their forecasts for the upcoming year. …

“As a result, stocks have been rising in the face of what is anything but inspiring data. In fact, they’ve been doing so on the very day they report disappointing results; on average, a stock has risen 0.7% on its report day this time around, which is the best on-day performance since the end of 2010. Last year’s second-quarter earnings season was also beset by European worries and weak corporate results, but back then stocks were losing upwards of 2% on the day they reported.

“Be prepared for continued equity market strength, albeit more stealth than not, through the fall.”

Clif Droke, Momentum Strategies Report, August 1:

“Although Knight Capital tried to blame the volatility spike on a technical glitch, I believe the internal cross-currents within the broad market are at least partly to blame. In other words, it could arguably be viewed as a symptom of the market’s undercurrents rather than a cause. As we mentioned in Monday’s report, the CBOE Volatility Index (VIX) confirmed a ‘breakout’ signal last week by closing two days higher above its 15-day moving average. Whenever this happens it tends to be followed by increased volatility in a growing number of stocks. …

“In the immediate-term (i.e. the 1-3 week outlook) the stock market is governed more by trader/investor psychology than probably any other factor. Immediate-term trader psychology can be very unpredictable, not to mention volatile. Participants are clearly on edge right now and are hanging on every headline that rolls across the news wire. With the Volatility Index (VIX) having recently closed two days higher above the dominant immediate-term 15-day moving average (circled below), the market is vulnerable to a negative news-driven surprise. Only if the VIX falls below the nearest pivotal low of 15.45 (the July 19 close) will the market be out of this vulnerable danger zone. Until then I think it best we remain respectful of the market’s potential for further volatility. …

“Note that the A-D Line in recent weeks hasn’t confirmed the higher high made by the S&P 500 Index (SPX) as well as the NYSE Composite Index. Instead, the A-D Line has made a slightly lower high. This non-confirmation of a new high in the S&P should be viewed as a ‘heads up’ that a temporary correction, or ‘pause that refreshes’ could be imminent.”

Bryan, Ronald & Michael Sadoff, Major Trends, (Sadoff Investment Management), July 31:

“Most (but not all) major bear markets have been confirmed when the advance/decline line deteriorates as the Dow or Standard and Poor’s 500 Index attains cyclical highs. So it is quite bullish that the NYSE advance/decline line is forging ahead to new cycle peaks. It has been leading on the upside. Quite impressive. Most stocks are participating in this advance.

“The advance/decline line plots how many stocks advance each day, how many decline and then nets out the difference and tabulates the differential on an ongoing cumulative basis. Yet the number of stocks hitting new yearly highs on the NYSE (tabulated on a 10 day average) peaked in April 2010. Since then this barometer has recorded declining peaks.

“This pattern suggests caution ahead. Our possible reason for the conflicting readings between these two technical indicators: the number of bond funds and preferreds (both acting well as interest rates push lower) that now trade on the NYSE.”

Richard Moroney, Dow Theory Forecasts, August 2:

“Nearly all the market’s recent strength has come from defensive, noncyclical stocks. The health care, telecom, and utility sectors have been the best performers over the past four months, while more cyclical sectors like energy, financials, materials, and technology have slumped. Nothing says all sectors must advance in unison in a healthy bull market. But defensive stocks already trade at unusually rich premiums to the average stock, so broader participation may be necessary to sustain the advance.”

Clif Droke:

“Traders should ideally wait for volatility to subside before making new commitments since volatility is a sword that cuts both ways.”