USA Corporate Profits & Dow Jones Forecast Business Cycle Investor NEWS DJIA QUARTERLY FORECAST - MARCH 30, 2006

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MARCH 30, 2006    RECOMMENDATION:  STAY OUT

We recommend to “Stay Out” of the broad USA Equity Indexes: DJIA and S&P500 until the next quarterly update on May 25, 2006.

Our prior quarterly forecast dated November 30, 2005 recommended a “Conditional Buy”.

The “buy” part of the recommendation was indicating that we expected a major upturn in the aggregate USA Corporate Profits for the 4^th Quarter 2005. The forecast was correct:

The U.S. Department of Commerce at www.bea.gov in table 6.16.D announced on March 30, 2006 that 4^th Qtr 2005 Corporate Profits recovered strongly growing by more than 14% in contrast to a 4% drop in previous Quarter (refer to a blue line on the above chart). The raising profits clearly stimulated Dow Jones Index (black line) growth in the period from November 2005 to March 2006.

The November Buy recommendation was conditional on DJIA dropping below 9,750 level. Since the USA stock market performed above that level throughout the past 4 months, we did not buy into the market. The DJIA traded in the range of 10,667 to 11,317 and the average daily level during this volatile period was 10,955 – close to our forecast range of 10,800–10,900.

Back in November 2005, we made a judgment that the upturn in the Business Cycle Index will be short lived and we expected it to reverse below average on March 30, 2006. Again, we were proved right:

Today, the Business Cycle Index (green line) indeed dropped below its average level which signals a beginning of deteriorating environment for the sustained Corporate Profits growth over the next quarter. As a result, we issued “STAY OUT” of the market Recommendation on March 30, 2006.

The November forecast was effectively stretching over two quarters. This situation will not be repeated often as our methodology was proven to give reliable forecast only one quarter in advance. We decided to take this exceptional step because it led to a more cautious conditional buy recommendation.

The market may not necessarily fall soon – in fact it may continue the uptrend for a while until the last quarter’s stimulus washes down through the economic system.

The “STAY OUT of the market” periods have been historically characterized by higher volatility and sometimes significant stock market falls. We cannot predict if the most negative scenario will be repeated during the current “Stay Out” period. All we can say is that based on 56 years history, there is a 40% probability of the major fall during “Stay Out” periods. 

The Chart illustrates recent performance until March 30, 2006.

Next quarterly update is planned for May 25, 2006.

Sincerely
The Business Cycle Investor Research
March 30, 2006

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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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