USA Corporate Profits & Dow Jones Forecast Business Cycle Investor DJIA QUARTERLY FORECAST - NOVEMBER 29, 2006 NEWS

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NOVEMBER 29, 2006    RECOMMENDATION:  STAY OUT

We recommend to “Stay Out” of the Dow Jones Industrial Average Index (DJIA) until the next quarterly update in March 2007.

Review of the past 3 months

The Third Quarter’s 2006 US Corporate Profits announced today by the USA Government at www.bea.gov grew at a moderate 4.2% rate, somewhat recovering from a low 1.4% growth in the previous 2-nd Quarter. The current growth is well below 10%+ achieved in the 1Q 2006 and 4Q 2005 (blue line on the chart). The result confirms the trend of weakening Corporate Profits growth consistent with our May and August 2006 forecast.

Despite the trend of weakening Corporate Profits growth, the DJIA rose to a high 12,227 level driven by more than 20% drop in oil prices below $60 and pause in the monetary policy at 5.25% by Ben Bernanke the new head of Central Bank appointed this year by the Republican President George W. Bush.

The oil prices easing was underpinned by OPEC’s decision (Saudi Arabia in particular) not to cut oil production levels despite the price drop and increased oil inventories in the absence of hurricanes in the Mexican Gulf this year. Negative forces such as weakening housing market played a lesser role.

Resulting overall positive sentiment drove the stock market up. The positive economic sentiment was not enough to stop voters in the November mid-term USA elections from giving the Democratic Party majority in both houses. Voters were apparently more influenced by the situation in Iraq.

4 months outlook:

Our forecast and recommendation is unchanged: STAY OUT of the market. The latest Business Cycle Index (green line on the chart) remains below its historical average level. This means unfavorable economic environment for the Corporate Profits growth and correlated with it broad USA stock market represented by DJIA and S&P500 indexes.

The “STAY OUT of the market” periods identified by our proprietary formula have been historically characterized by low returns (50+years historical average was 2.4%p.a.) higher volatility and 40% chance of a major fall in excess of -20% (refer to “maximum fall” column in “Out Period” Performance table). The OUT of the market Periods can however experience bubbles characterized by a significant stock market gains despite the slowing Corporate Profits trend.

While the methodology is good for identifying the major market upturns, it does not forecast which “Out Period” will experience the major fall and when it is likely to happen.

The Charts above illustrate recent performance until November 29, 2006.

Next quarterly update is planned for end of March 2007.

Sincerely
The Business Cycle Investor
November 29, 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 Subscribers invest directly in the large USA market index Exchange Traded Funds (ETF) that trace Dow Jones Industrial Average or Standard & Poor's S&P 500 indexes or in an equivalent liquid USA market index mutual funds.

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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