USA Corporate Profits & Dow Jones Forecast Business Cycle Investor NEWS DJIA QUARTERLY FORECAST - SEPTEMBER 5, 2005

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SEPTEMBER 5, 2005    RECOMMENDATION:  STAY OUT

We recommend to STAY OUT of the broad USA Stock Market following our last sell signal on March 30, 2005.

Since our March 30, 2005 SELL Recommendation the Dow Jones Industrials Average (DJIA) has not moved much ending at 10,447 level on Friday September 2, 2005 (down -0.9% since March 30, 2005.

During August 2005, the US Government revised a wide range of reported economic indicators for the 2002-2005 period. All our previous charts have been updated accordingly and you will notice a slight change in the shape of the Corporate Profits blue line. Our past Recommendations were not affected.

3 months outlook:

Our latest Business Cycle Index remains clearly below the average level. This means unfavorable economic environment for the sustained Corporate Profits growth and correlated with it broad USA stock market represented by DJIA and S&P 500 indexes.

While the last quarter’s Corporate Profits continued to grow at a steady rate, we expect it to run out its course over the short to medium term. We view it as leftovers from the last “IN Period” number 14.

In addition, record oil prices (up to US$70 per barrel) during the past quarter have continued to depress the stock market. The sudden large oil price hikes have had historically an immediate negative psychological impact on the stock market. Such events cannot be accurately predicted and hence any stock market forecast is associated with some degree of uncertainty.

In the event of oil prices falling significantly during the next 3 months we may see a recovery of the stock prices. Such recovery would be most likely short lived because our index suggests that the Corporate Profits growth is unlikely to meaningfully accelerate over the next 3 months. And without sustained Corporate Profits growth rate, 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 (on the up and down-side) 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 September 2, 2005.

Previous quarter's forecast dated May 26, 2005 can be viewed at this link.

The next update is planned end of November 2005.

Sincerely
The Business Cycle Investor Research
September 5, 2005

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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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