USA Corporate Profits & Dow Jones ForecastBusiness Cycle InvestorDJIA QUARTERLY FORECAST - NOVEMBER 30, 2005 |
NOVEMBER 30,
2005 RECOMMENDATION:
CONDITIONAL BUY –
when DJIA falls below 9,750
We recommend to standby for a possible move back IN the broad USA Stock Market following a CONDITIONAL BUY signal from our Business Cycle Index. We would buy the market index only when the Dow Jones Industrial Average (DJIA) index fell below 9,750 level. We do NOT recommend to use leverage.
This recommendation would normally be valid until the next quarterly update by the end of March 2006. But given the unusual circumstances, we shall contact our subscribers with updates; should the future events warrant a change to the recommendation.
This is one of the toughest calls to make.
Let’s first say that we were right in the previous quarters to expect unfavorable conditions for Corporate Profits. Indeed, the third quarter profits announced by the U.S. Government at www.bea.gov on November 30, 2005 decreased significantly (see blue line on the chart).
The profits drop was magnified by the negative impact of Hurricanes Katrina and Rita in August 2005, reflecting the net benefits paid by U.S. insurance companies and the uninsured losses of corporate property.
The insurance payouts have been pumped back to the economy by consumers eager to spend and rebuild their lives – that should partly help businesses to restore their profits soon.
Other factors which are taken into consideration when calculating our Business Cycle Index have also moved into positive territory and should drive Corporate Profits higher in the medium term.
All these factors led to a Buy signal from the Business Cycle Index. However, after a careful consideration, we do NOT recommend to jump into the market immediately. The buy recommendation is conditional on DJIA falling below 9,750 level.
The reasons for the cautious approach are many.
The situation is highly untypical by historical standards – in the last 56 years of our index validation we have never had a buy signal for the reasons we have today. The unusual factors that drove the Business Cycle Index above average can reverse very quickly and negatively impact the market without a delay.
Secondly, the market has been in recent weeks very efficient and largely priced-in the anticipated recovery in the Corporate Profits. Consequently, we are not recommending to buy the market index unless DJIA falls below 9,750 level. This may seem far away from the current 10,800-10,900 range but in our judgment, the times ahead are likely to be volatile and chasing what could be a relatively small gain, would be in our view too risky.
In times like this, use of leverage is not recommended.
If you are in doubt, stay away from the market – protection of capital is the first priority for a prudent investor.
Please interpret our signal as a forecast that Corporate Profits should turn up again, but the stock market will not necessarily grow much from the current 10,800-10,900 levels. For those investors who are already invested in the market we would suggest to stay invested this quarter. By setting the low 9,750 “buy” level we are not trying to imply that we expect the market to fall to that level. We are simply saying that in our view the market has already priced-in the anticipated rise in Corporate Profits and for new investments, the 9,750 would be an attractive level to buy during this quarter. The next update of our Index in March 2006 should clarify if this is a beginning of a new solid upturn or only a temporary spike similar to the last year's “In Period” number 14 that lasted only for one quarter.
The Chart illustrates recent performance until November 30, 2005.
Previous quarter's forecast dated September 5, 2005 can be viewed at this link.
The next standard update is planned for end of March 2006 but it is possible we will issue interim updates.
Sincerely
The
Business Cycle Investor Research
November 30, 2005
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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.
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.
More information about the research methodology can be found at www.businesscycleinvestor.com/methodology.htm
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