Is this the real deal or another fake out?

Unless you were in the I fund, what we basically saw in September was a reversal of August's action.  The C and S funds were able to gain back most of August's losses and the F fund gave back most of August's gains.

Now we head into October, the last of the "bad months" as determined by the
"Six-Month Stock Market Timing Strategy" a.k.a. "Sell in May and Go Away."  The strategy is pretty self-explanatory as the premise is to be in stocks from November to April and go to cash or bonds from May to October.  That is a long term strategy (decades) and obviously does not work on a year to year basis as 2005 has shown us. 

So what should we expect now?  September ended on a positive note bucking the historical tendencies of being an underperforming time of year.  October has a reputation of starting strongly but also is infamous for some major market crashes and market bottoms.  Overall it is not a terrible month historically.

There are many reasons to believe the market is ready to rally but some of the more internal type readings tell me all may not be totally well.  I don't want you to think of me as a perma-bear because I am really looking forward to putting my money back into stocks for a longer period of time.  Those of you who have been with me for a year or more know that I can get very bullish.  I'm just not there yet.  So rather than focus on the positive that is around us, I will tell you why I am still skeptical of the current market.

The main reason is that I don't believe the herd has reacted to the recent economic situation the way you would like to see in order to put in a longer term bottom.  We have oil and gas prices at levels never seen before.  We have a Fed that has raised rates eleven times in a row and has given us no indication that they are going to stop any time soon.  The potential earnings fallout from the recent jump in gas prices and the two hurricanes has not yet been seen.  These earnings warnings and reports should be hitting us within the next few weeks. 

I mentioned the AAII Investor Sentiment Survey last week and here is the chart. 





                      Charts provided courtesy of www.decisionpoint.com

With all of the market obstacles I mentioned above, the bears have not gone over the 40% level yet and the bulls have not gone below 30%.  A good bottom will usually see these extremes reached.  Back in March and early April, the last time I turned bullish, we did see bears over 40% and bulls under 30%.  Another move down, particularly below 1200 on the S&P 500, will likely do the trick.

The put/call ratios are also good indicator to use to measure sentiment.  The 15-day CBOE OEX put/call ratio has still not reached the bullish zone (green lines) as we see at other market bottoms.




This tells me that we may have a bit more weeding out to do of the weak bulls.  A weak bull is a bull that will turn run as things are looking their worst.  They are usually too late.  There are strong bulls around also who realize we are closing in on the next bull market leg up and are not going to sell regardless.  Rather they will buy the dips so they are loaded up on stocks near the bottom.  The bottom will come when the last of the weak bulls turn bearish.  That's when I'll turn bullish again.  Hopefully that will happen some time in October or November.  I hope that doesn't sound like a lot of bull, because that is just how sentiment works.

Bottom line I head into October cautious yet optimistic.  I am still playing defense waiting on a better buying opportunity that I believe will come in the weeks ahead.

That's all for today.  Currently 100% G fund.  Thanks for reading.