MAY 26, 2005
RECOMMENDATION: STAY OUT
We recommend to STAY OUT of the broad USA Stock Market following our
March 30, 2005 sell signal.
Our previous
March 30, 2005 Recommendation to Sell proved correct – the Dow Jones
Industrials Average and S&P 500 indexes fell almost immediately
after our Sell signal and only recently recovered, ending the
reporting period flat at 10,538 on May 26, 2005. While we are happy with producing
a very accurate forecast, we humbly remain ourselves that our
Business Cycle Index was in the past often less accurate over short periods.
We also correctly
anticipated the Corporate Profits trend: growth slowed from +13.5% in
the previous quarter down to +4.5% (revised on June 29 to +6.0%) in the 1st Quarter
2005 according to the US Government data released on May 26, 2005
(revised on June 29) at
www.bea.gov.
3 months outlook:
The Business
Cycle Index remains clearly below the average level. This means
continuing unfavorable economic environment for the Corporate
Profits and broad USA stock market represented by Dow Jones
Industrial Average and S&P 500 indexes.
High oil price
(above US$50 per barrel) during the reported period have continued
to depress the stock market. The impact is apparent in widening of
the gap between Dow Jones (black line) and Corporate Profits (blue
line) which normally trend very closely given 93% historical
correlation.
The widening gap
suggests that should the oil price fall significantly during the next
3 months we may see a “catching up” recovery of the stock prices.
Such stocks recovery would be most likely short lived because our
index suggests that growth in Corporate Profits is unlikely to
meaningfully accelerate over the next 3 months. And without the
Profits growth the stock market would not be able to sustain its
gains for long.
Our recommended
“OUT of the market” periods are typically, although not always,
characterized by higher volatility and sometimes significant stock
market falls. We cannot predict if the most negative scenario will
be repeated in the current cycle. All we can say is that
based on history, there is a 40% probability of the negative scenario.
The Chart illustrates recent performance until May 26, 2005 (Profits
revised June 29).
Sincerely
The
Business Cycle Investor
May 26, 2005
_______________________________________________________________________________
How to use the buy & sell signals?
Investment Banks, Institutional
Investors and Hedge Funds use the advice
for
proprietary trading, global
asset allocation
and leveraged strategies decision support.
Individual Investors invest
directly on
the quarterly buy and sell
signals in the USA market DJIA or S&P500 index Exchange
Traded Funds (ETF)
or in an equivalent liquid USA market
index mutual fund.
The ETF funds trade on
the stock market just like normal stocks. One transaction in ETFs
provide investors with diversified blue chip portfolio and solid
dividends. Transaction and management costs are minimal.
Stock market follows aggregate Corporate Profits
The proprietary Business Cycle Index is an effective leading indicator of
corporate profitability for the whole USA economy. The aggregate US Corporate Profits are
calculated quarterly by the USA Government and published at
www.bea.gov where
subscribers may independently verify the forecast.
Corporate Profits have historically shown a high 93%
correlation with moves in the major diversified USA stock market indexes: Dow
Jones Industrial Average (DJIA) and S&P 500. Hence, the Business Cycle Index can be
used as a leading indicator of the broad USA stock market.
The Corporate Profits for the whole US economy don't always move in the same
direction or by the same magnitude as the profits reported by
individual companies or even the DJIA or S&P 500.
Validated Methodology
The
proprietary methodology was validated over more than
fifty years of historical data. The Business Cycle Index, first developed and published in
2004, proved to be a consistently accurate indicator of economic conditions
that led to turning points in the Corporate Profits and the broad stock
market indexes.
More information about the research methodology can be found at
www.businesscycleinvestor.com/methodology.htm
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Past results are not necessarily indicative of future
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same regulatory requirements as mutual funds, often charge high fees, and in
many cases the underlying investments are not transparent and are known only
to the investment manager.
Disclaimer. This information is
not to be construed as an offer to sell or the solicitation of an offer to
buy any securities. The information has been prepared from a wide variety of
sources that publisher GB Capital Pty Ltd (“GBC”), to the best of its
knowledge and belief, considers accurate. GBC does not warrant the accuracy
of the information and forecasts contained here. Opinions expressed in these material may change without
prior notice.
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rely solely upon the general information and/or general recommendations
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