This latest update shows some recovery of the diversification effect in the equity classes, although the most conspicuous equity variance is the relative underperformance of the REIT index.

This latest update shows some recovery of the diversification effect in the equity classes, although the most conspicuous is the relative underperformance of the REIT index.

How do we protect against these infrequent but destructive events? First we need to understand that they do happen — a reality this website has tried to illustrate over the past two years. Followers of buy-and-hold investing need to balance risky assets with an appropriate, age-adjusted ratio of fixed-income assets in their portfolios. This will help to minimize the chance that a market implosion near or in retirement is a life-changer.

Another approach is to employ a tactical asset allocation strategy that attempts to reduce equity holdings when the market appears significantly overvalued or when it is trending down. Both of these conditions, market valuation and moving averages, are periodically addressed at this website.

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The S&P 500 closed the day down 0.89%, which puts the year-to-date loss at 5.2%. The index is 56.2% above the March 9, 2009 closing low, which is 32.5% below the peak in October 2007. The correction from the interim high on January 19th is now 8.1%.

Here is a StockCharts.com snapshot showing the relationship of the S&P 500 to its 50- and 200-day simple moving averages.

Click here to review the previous rallies during the current bear market, and here's a table showing the 1929-1932 Dow rallies.

Since inflation is a favorite topic on this website, I now regularly update a set of charts to facilitate a comparison of the nominal and real declines. See also my logarithmic scale view of the "Four Bad Bears" comparison.

For charts of other bear market recoveries, see The Bear Bottoming Process. More...

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This chart is an offshoot of my Four Bad Bears. It shifts the point of alignment from the pre-bear highs to the bear bottom in the Oil Crisis and Tech Crash, the first major low in the 1929 Dow, and the March 9th closing low for our current Financial Crisis.

As the chart illustrates, the S&P 500 lows in 1974 and 2002 marked the beginnings of sustained recoveries. The Dow low in 1929 failed 11 months later.

Here is the same chart adjusted for inflation.

For a more optimistic alternative view, suggested by an investment professional and visitor to this website, see this post.

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The Dow

Now that the Dow is playing peek-a-boo with the 10,000 level, I was interesting in plotting the index against this memorable benchmark.

The Dow first broke the 10,000 level in March 1999. Since that time the daily close has crisscrossed that number 57 times in nearly eleven years.

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Unemployment in Review

A regular monthly feature of this website is a chart overlay of monthly unemployment and the S&P 500 since 1948, the year Uncle Sam began tracking labor statistics. A fascinating chart at CalculatedRisk examines the data since 1969 on the unemployed for more than 26 weeks (see chart). This prompted me to overlay the same data since 1948 on the S& P 500. Click on the thumbnail at right for a larger version. The implications for further market recovery aren't encouraging. I'll be adding this chart to my regular monthly unemployment updates.

Market Timing with Weekly Moving Averages

As regular visitors to the website know, I keep an eye on monthly moving averages for potential buy/sell signals. Of course there are many momentum timing systems out there. The Ocean Portfolio blog is an interesting website that focuses on 4, 18 and 39-week moving averages for investment decisions — an interesting alternative for those who prefer to trade more frequently.

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It's time again for the weekend update of our "Real" Mega-Bears, an inflation-adjusted overlay of three secular bear markets. It aligns the current S&P 500 from the top of the Tech Bubble in March 2000, the Dow in of 1929, and the Nikkei 225 from its 1989 bubble high.

This series is consistent with my preference for real (inflation-adjusted) analysis of long-term market behavior. The nominal all-time high in the index occurred in October 2007, but when we adjust for inflation, the "real" all-time high for the S&P 500 occurred in March 2000.

This chart series now includes a nominal version to help clarify the illusion of market performance created by inflation.

For those who prefer the overlay aligned with the 2007 S&P 500 peak, here is our nominal Mega-Bear Quartet charts and commentary.

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Here's an update from Serge Perreault, a Chartered Accountant and market technician located near Montreal, Canada. Serge anticipated the S&P 500 pullback and has nicely annotated its progress in a series of posts:

• Jan 19: Daily chart with correction targets
• Jan 24: Weekly chart with downtrend support and resistance
• Jan 31: Weekly chart marking an up-cycle within a downtrend

Serge's latest chart identifies a new support level around 1029, the vicinity of the low at the beginning of November. A decline to that level would constitute a correction of 10.5% — a near bull's eye (pun intended) for the classic 10% pullback.

Click the chart for Serge's full commentary.

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Note: The latest Standard & Poor's earnings spreadsheet (February 3) puts the annualized dividend yield at 2.03% and the indicated rate at 1.99% (The indicated dividend is the estimate for the next four quarters, based on what was paid in the most recent period).

What happened? Investors shifted their focus from income streams to price appreciation. As a first-wave Baby Boomer, I see this shift as a result of three things:

A New Investor Class

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The monthly unemployment rate for January fell to 9.7% — down from 10% in December. The peak for the current cycle was 10.2% in October 2009. The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948.

Unemployment is usually a lagging indicator that moves inversely with equity prices (see chart). Note the increasing peaks in unemployment in 1971, 1975 and 1982. The inverse pattern becomes clearer when viewed against real (inflation-adjusted) S&P Composite, with its successively lower bear market bottoms. The mirror relationship seems to be repeating itself with the current and previous bear markets.

The second chart is one of my favorites from CalculatedRisk. It shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost).

Here is a link to the Employment Situation Summary released this morning by the Bureau of Labor Statistics.

The start date of 1948 was determined by the earliest monthly unemployment figures collected by the Bureau of Labor Statistics. The best source for the historic data is the Federal Reserve Bank of St. Louis.

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The new issue of the Rule Your Retirement newsletter is now available.

• This month's Perfect Your Portfolio feature, Build a Nest Egg That Lasts Longer Than You Do, identifies the five biggest risks to a retirement portfolio, and it offers convincing statistics to finger the most dangerous of the five.
  
  
• The Expert Corner, Confronting the Reality of Your Retirement, is an interview with Jim Otar, the author of Unveiling the Retirement Myth. You've outgrown the Tooth Fairy, but are there some retirement planning fictions you need to discard?
  
  
• The Wealth Defense section gives some tips on how to Survey Your Stuff. As someone whose gone through nearly four decades of household upsizing and downsizing, I heartily endorse the advice here.
  
  
• This month's Asset Focus is on Mid Caps, an asset class that has outperformed large and small caps over the past five and 10 years.
  

As regular visitors to this website know, I've been a frequent contributor to the Motley Fool Rule Your Retirement subscription service, and I routinely "stroll" the RYR discussion boards as TMFDoug.

Like many blogs, my dshort.com website has context-sensitive ads controlled by third parties. Rule Your Retirement is the exception. It has my full endorsement. If retirement planning is a topic you want to know more about, consider a 30-day free trial.

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A few facts about today's S&P 500 selloff:

• The decline from the interim high on January 19th is 7.6%. A classic 10% correction would take us to 1035.
• Today's decline was 3.11%. There have been 36 declines greater than 3% since the index peaked in October 2007. Thirty two occurred between the peak and the low on March 9th of last year. Four, including today, have occurred since the low.
• The greatest decline over this timeframe was 9.03% on 10/15/2008.
• The greatest advance of 11.58% occurred two days earlier on 10/13/2008.
• Volume in today's selloff was the third highest of the year (corrected from the original post).

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About the only certainty in the stock market is that, over the long haul, overperformance turns into underperformance and vice versa. Is there a pattern to this movement? Let's apply some simple regression analysis to the question.

Here's a chart of the S&P Composite stretching back to 1871. The chart shows real (inflation-adjusted) monthly averages of daily closes. We're using a semi-log scale to equalize vertical distances for the same percentage change regardless of the index price range. The regression trendline drawn through the data clarifies the secular pattern of variance from the trend — those multi-year periods when the market trades above and below trend.

Bearish and Bullish Interpretations: More...

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Today's S&P 500 close moved us further above the support level that technical analyst Serge Perreault discussed in this item posted over the weekend. Volume, however, remains weaker than last week's selloff. Check out this chart to see what I mean.

An email just in from Serge points out that "The biggest test remains the 50 day moving average. Indeed, if you notice, on my week-end graph, the 10MA is at the same level as the 'Downtrend Resistance' dating back to 2007."

Note: The chart linked from the thumbnail above is a live chart, so the little version won't match after the next market open. Perhaps that will be a good thing.

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Here's a new update of our preferred market valuation method using the latest Standard & Poor's earnings estimates and the index monthly averages of daily closes through January 2010.

The "price" part of the P/E calculation is available in real time on TV and the Internet. The "earnings" part, however, is more difficult to find. The authoritative source is the Standard & Poor's website, where the latest numbers are posted on the earnings page. Click on the Index Earnings link in the right hand column. Free registration is now required to access the data. Once you've downloaded the spreadsheet, see the data in column D.

The table here shows the TTM earnings based on "as reported" earnings and a combination of "as reported" earnings and Standard & Poor's estimates for "as reported" earnings for the next few quarters. The values for the months between are linear interpolations from the quarterly numbers.

The average P/E ratio since the 1870's has been about 15. But the disconnect between price and TTM earnings during much of 2009 was so extreme that the P/E ratio was in triple digits — as high as 122 — in the Spring of 2009. At the top of the Tech Bubble in 2000, the conventional P/E ratio was a mere 30. It peaked north of 47 two years after the market topped out.

As these examples illustrate, in times of critical importance, the conventional P/E ratio often lags the index to the point of being useless as a value indicator. "Why the lag?" you may wonder. "How can the P/E be at a record high after the price has fallen so far?" The explanation is simple. Earnings fell faster than price. In fact, the negative earnings of 2008 Q4 (-$23.25) is something that has never happened before in the history of the S&P 500.

The P/E10 Ratio
Legendary economist and value investor Benjamin Graham noticed the same bizarre P/E behavior during the Roaring Twenties and subsequent market crash. Graham collaborated with David Dodd to devise a more accurate way to calculate the market's value, which they discussed in their 1934 classic book, Security Analysis. They attributed the illogical P/E ratios to temporary and sometimes extreme fluctuations in the business cycle. Their solution was to divide the price by the 10-year average of earnings, which we'll call the P/E10. In recent years, Yale professor Robert Shiller, the author of Irrational Exuberance, has reintroduced the P/E10 to a wider audience of investors. As the accompanying chart illustrates, this ratio closely tracks the real (inflation-adjusted) price of the S&P Composite. The historic P/E10 average is 16.3.

The Current P/E10
After dropping to 13.4 in March 2009, the P/E10 has rebounded above 20. The chart below gives us a historical context for these numbers. The ratio in this chart is doubly smoothed (10-year average of earnings and monthly averages of daily closing prices). Thus the fluctuations during the month aren't especially relevant (e.g., the difference between the monthly average and monthly close P/E10).

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I received some feedback requesting that I not discontinue posting the 12-month moving average signals for The Ivy Portfolio ETFs. I may reconsider. Meanwhile, here are those 12-months SMA signals. A comparison with the 10-month Ivy SMAs shows the bond and commodity ETFs (DBF and IEF) swapping alerts.

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Was March 9th 2009 the end of a secular bear market in the S&P 500, or is there more downside to come? Without crystal ball, we simply don't know.

One thing we can do is examine the past to broaden our sense of the range of possibilities. An obvious feature of this inflation-adjusted chart of the S&P Composite is the pattern of long-term alternations between up- and down-trends. Market historians call these "secular" bull and bear markets from the Latin word saeculum "long period of time" (in contrast to aeternus "eternal" — the type of bull market we fantasize about).

If we study the data underlying the chart, we can extract a number of interesting facts about these secular patterns: More...

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Market timing with moving averages (aka tactical asset allocation) is a regular topic on this website. My initial posts on the subject focused on the historic record of monthly moving averages in the S&P 500. After the publication of The Ivy Portfolio, I began including timing updates for the five ETFs featured in that book.

To make the monthly signals more accessible, I've renamed a permanent link in the left column: Timing Signals (formerly Moving Averages). This item pairs with the Timing Updates link, which provides interim data between the monthly closes. Also, I'm discontinuing the Ivy Portfolio Charts link in deference to charts now posted at Mebane Faber's World Beta website.

Finally, I want to alert readers to the Tactical Asset Allocation for the Masses blog. This is a useful resource for anyone seeking an application of the Ivy Portfolio timing strategy to additional ETFs. The TAA website also features updates on sector and asset-class rotation.

Tactical asset allocation with moving averages has been around for decades, but its suitability for the individual investor is heavily dependent on many factors — investment goals, personal discipline, risk tolerance, tax implications, and transaction costs, to name just a few. My periodic focus on this topic should not be taken as a general recommendation.

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Here's the latest weekend update from Serge Perreault, a Chartered Accountant and market technician located near Montreal, Canada. Serge anticipated the correction in the S&P 500 in his last post from a week ago, which included a couple of downside targets: -3.3% and -5.7%. The index is now 6.6% off its interim high. Thus it has fallen below the technical support level (A on the chart), which was around 1085.

Serge's latest chart updates his weekly view and highlights the downtrend support and resistance from the market peak in October 2007. Now that the index has broken support, the apparent uptrend that Serge annotated last week (the B line in the chart), appears to be an up-cycle within the larger downtrend.

In the email accompanying the chart, Serge explained the difference between trends and cycles:

In technical analysis, there are three types of movements: uptrends, downtrends and "no-trend" sideways movements. I refer to up and down movements within a trend as "cycles." This explains my description of the S&P 500 as being in an up-cycle within a downtrend.

Click the chart for Serge's full commentary.

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As January Goes, So Goes the Year?

The italicized tease is the title of an article I posted a year ago on the January performances in all the years with negative returns since 1871. Earlier this month, a similarly titled WSJ article provided a more elaborate study of the Dow data since 1900. Particularly interesting is an accompanying graphic comparing the Dow median gain for the year since 1900 when January is up (+10.4%) and when it's down (+0.3%).

I originally posted this item when the January S&P 500 had slumped -1.6% with two trading days left in the month. The final January close was down over double that amount at -3.7%. Should we expect 2010 to close lower? Let's examine the S&P data since 1928. The accompanying table uses a color scheme to highlight the correlation between Januarys and year-end performances. About 73% of the time there is a correlation, with 60 of the 82 Januarys matching the direction of the year. Note: I lump 1947, when the index finished flat, as a down year and hence a mismatch for the January 1947 gains.

The average index gain in years with a positive January close is 12.9%. In negative January years the index has averaged -2.8%.

There seems to be a pattern here, but the extreme outlyers make these stats more a curiosity than a "take action" indicator. Last January the index lost 6.1% but closed the year up 23.5%. Similar upside mismatches occurred in 1928 and 2003. On the other hand, check out the extreme negative annual returns in the January up years of 1929, 1930, 1931 and 1937.

Interesting stuff, but scarcely the foundation of an investment strategy.

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The S&P 500 closed the month of January 3.7% below the December close. However, all three of the S&P 500 monthly moving averages we've been tracking continue to favor equities.

Since 1950 the S&P 500 10-month SMA has had 41 buy signals; 26 of them (63.4%) led to a gain before the next sell signal, 15 of them (36.6%) led to a loss. The 12-month SMA has had 31 buy signals, 21 (67.7%) led to a gain before the next sell signal, 10 (32.3%) led to a loss. These moving-average signals have a good track record for long-term gains while avoiding major losses. But they're not fool-proof.

The Ivy Portfolio

Here is a table with the current signal for the 10-month SMA for the five ETFs featured in The Ivy Portfolio.

Note: The moving averages in the table are based on data from Yahoo! Finance.

Background on Moving Averages

Buying and selling based on a moving average of monthly closes can be an effective strategy for managing the risk of severe loss from major bear markets. In essence, when the monthly close of the index is above the moving average value, you hold the index. When the index closes below, you move to cash. The disadvantage is that it never gets you out at the precise top or back in at the very bottom. Also, it can produce the occasional whipsaw (short-term buy or sell signal). More...

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Earlier this month I announced the latest Rule Your Retirement newsletter, which appropriately kicked off the new year with four steps and a monthly checklist for improving your fiscal fitness.

The video below is a pop quiz for retirement readiness. Watch it, monitor your reaction, and then continue reading below:

If you found yourself nodding in agreement, then you should already have a sound retirement plan in place. That means knowing

• how much you'll need in savings
• that you're saving enough and investing it appropriately
• and how much you can withdraw annually after you retire.

Good financial planning doesn't happen overnight, but you can take advantage of a 30-day free trial of Rule Your Retirement that will give you access to a realistic regimen for fiscal fitness. And it's never too soon to start. As of today, we're already eight-percent of the way through 2010. That's right, eight percent! Time waits for no one.

As regular visitors to this website know, I've been a frequent contributor to the Motley Fool Rule Your Retirement subscription service, and I routinely "stroll" the RYR discussion boards as TMFDoug.

Like many blogs, my dshort.com website has context-sensitive ads controlled by third parties. Rule Your Retirement is the exception. It has my full endorsement. If retirement planning is a topic you want to know more about, consider a 30-day free trial.

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The market futures signaled a weak open. Will the apparent correction that started last week continue today?

I've now updated one of my daily chart updates to show those three declines. A 10% correction from the interim high of 1150.23 on January 19th would take the index to the vicinity of 1035.

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Here's a weekend update from Serge Perreault, a Chartered Accountant and market technician located near Montreal, Canada. Serge anticipated the correction in the S&P 500 in this previous post from January 19th, which included a couple of targets: -3.3% and -5.7%. At the end of the week the index had declined 5.1%.

The earlier chart annotated the uptrend support from the S&P 500 low in March 2009. Serge's new chart switches to a weekly view and highlights the downtrend support and resistance from the index peak in October 2007.

Click the chart for Serge's full commentary.

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We have a bit of suspense going into today's S&P 500 end-of-week open. Thus far a two-day correction has dropped the index to the vicinity of the 50-day simple moving average. During the past five months the index has twice before corrected to this area. The first time was a text-book bounce off the MA indicator. The second saw a tough tussle out between the two before the index emerged victorious.

What will be the case with this corrction? We've yet to see a classic 10% retracement since the market's meteoric rise began last year. This is earning season — a time of uncertainty and occasional drama. And today is Friday.

Should be interesting!

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The Rule Your Retirement mid-month update, just released, features the quarterly issue of Champion Funds. In it you'll find:

• an outstanding actively managed mid-cap value fund
• five tips to prepare your portfolio for profit in 2010 and beyond
• an overview of target-date funds and whether they're a good choice for you
• how the RYR model portfolios are doing
• the freshest news from the big fund families and performance data on the Champion Funds Top 40+

As regular visitors to this website know, I've been a frequent contributor to Rule Your Retirement, and I routinely "stroll" the RYR discussion boards as TMFDoug.

Like many blogs, my dshort.com website has context-sensitive ads controlled by a third party. Rule Your Retirement is the exception. It has my full endorsement. If retirement planning is a topic you want to know more about, consider a 30-day free trial.

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Here's another technical commentary from Serge Perreault, a Chartered Accountant located near Montreal, Canada. Serge has some thoughts on the continuing uptrend and prospects for a correction. He's analyzed the performance of the S&P 500 since the March 2009 low in a chart with attention to trends in price, volume, relative strength, and rate of change.

Serge notes the divergence in volume and momentum and a potentially overbought condition, and he estimates some possible targets for correction.

Click the chart for Serge's full commentary.

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Here's a sobering set of charts that will especially resonate with those of us who follow economic cycles.

Imagine that ten years ago you invested $10,000 in the S&P 500. How much would it be worth today, adjusted for inflation with dividends reinvested? Brace yourself: Your investment has shrunk to about $7,246, an annualized return of -3.17%. That's a 27.5% loss.

And this is an improvement over the same ten-year return as of March, when your annualized return would have been -5.93%, for a total loss of 45.7%.

Now let's imagine that we time-travel back to September 2000 and pose the same question. Your ten-year inflation-adjusted gain would have been 396% for an annualized return of 16.13%. As the chart illustrates, investment performance with a 10-year timeline has been a real roller coaster as far back as we have data.

If we extend our investment horizon to 20 years, the roller coaster is less volatile with higher lows and lower highs. The volatility decreases further with a 30-year timeline. But even for that three-decade investment, the annualized returns since the 1901 have ranged from less than 2% to over 11%.

As these charts illustrate, and as many households have discovered over the past two years, investing in equities carries risk. Households approaching retirement should understand this risk and make rational decisions about fixed income alternatives for that part of the nest egg that will pay non-discretionary expenses not covered by Social Security and pensions.

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Here's a new chart that gives a closer view of the cyclical rallies and their duration during Japan's secular bear market, now in its 20th year.

I've been posting a weekly updates of a mega-bear market charts (here and here) that includes Japan's Nikkei 225. In addition, every month or so I've update an inflation-adjusted overlay of the Nikkei 225 and S&P 500 bubbles.

The table below documents the Nikkei 225 advances and declines and the elapsed time for each.

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The latest annualized rate is 2.72%.

The December 2009 Consumer Price Index for Urban Consumers (CPI-U) is 215.949. The annualized inflation rate computed from this number is 2.72%, which marks the second month of inflation after a streak of 8 consecutive months of deflation. The average rate over the past twelve months, however, is -0.34%, the first negative calendar-year average since 1955.

Note: The Alternate CPI puts the annualized inflation rate at 9.68%. This number comes from the ShadowStats.com pre-1982 calculation method.

The Bureau of Labor Statistics (BLS) began calculating the CPI in 1913 (BLS historic data). Our chart now shows inflation back to 1872 by adding Warren and Pearsons's price index for the earlier years. The spliced series is available at Yale Professor Robert Shiller's website. This look further back into the past dramatically illustrates the extreme oscillation between inflation and deflation during the first 70 years of our timeline.

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The latest Rule Your Retirement newsletter was published today, and it contains one of the finest financial planning regimens I've yet to encounter. RYR leader Robert Brokamp, a Certified Financial Planner, kicks off a new year of fiscal fitness with a 20-page special report that offers a month-by-month checklist of key topics for your financial focus. The heading for most months is self-explanatory, but I've added clues for a few:

• January: Become a Money Mangement Master
• February: Maximize your Investment Accounts
• March: Pay for Civilization (hint: Uncle Sam is just around the corner)
• April: Get a Fix on Your Fixed Income
• May: Take Stock of Your Investments
• June: Plan for the Hereafter (some details I hadn't thought of)
• July: Cover Your Assets
• August: Home Sweet Help (is your house an asset? a liability? or both?)
• September: Save for Big-Ticket Items
• October: Cut Your Costs
• November: Maximize Benefits
• December: Give Yourself a Financial Checkup

This month's Expert Corner is an interview with my favorite financial historian, William Bernstein, whose latest book, The Investor's Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between, is a must read.

The newsletter's Wealth Defense article, Find a Pro Who Works on Your Terms, asks the key question "Are You Being Advised or Sold?" If you could use some professional assistance with your finances, this article gives you the lowdown on what fiduciary responsibility means and how you go about getting advice from someone who puts your interests first, not their own.

The Asset Focus section takes a look at REITs, an especially controversial asset class in recent years. Do REITs belong in your portfolio? The article examines this conundrum.

As regular visitors to this website know, I've been a frequent contributor to the Motley Fool Rule Your Retirement subscription service, and I routinely "stroll" the RYR discussion boards as TMFDoug.

Like many blogs, my dshort.com website has context-sensitive ads controlled by third parties. Rule Your Retirement is the exception. It has my full endorsement. If retirement planning is a topic you want to know more about, consider a 30-day free trial.

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Here is a series of real (inflation-adjusted) monthly close charts of the Nikkei 225 and the S&P 500 since 1970 with their respective annualized rates of inflation shown below. This series also includes an overlay chart with the two index peaks aligned. The overlay retains Japan's inflation to illustrate a point discussed later in this post.

The left sides of the two bubbles are remarkably similar. More conspicuous, however, are the dissimilar contours of the post-bubble declines. More...

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I've occasionally featured technical commentary from Serge Perreault, a Chartered Accountant located near Montreal, Canada. Serge has some fascinating observations on the threshold of the new market year. His focus is the performance of the S&P 500 over the past three years in a chart that he shared with me over the weekend.

Serge reviews the technicals, observes the recent patterns of volume and momentum, and asks the inevitable question.

Click the chart for Serge's full commentary.

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