It's almost time to get bullish but there is still work to be done.

I am seeing more and more evidence that we are approaching the end of this consolidation period but we may not be quite out of the water yet.

The support and resistance trend lines on the S&P 500 chart are converging.  They are converging almost exactly toward the break even point for the year.  Will it break to the upside, or to the downside?


                      Charts provided courtesy of www.decisionpoint.com

In January I was approaching the new year with caution expecting another consolidation period after the nice bull market in the second half of 2004.  The S&P 500 is up a mere 1.2% this year.  I was cautious but I would have actually done better being even more cautious as the G fund is out performing the C fund in 2005.  On the other hand I could also have been more aggressive by being more invested in the volatile S and I funds which have both done very well over the past four months.

My return this year, just under 1%, is the result of being cautious and a couple of hits when in stocks early in the year.  I certainly could have timed things better in the short term during the year, but the fact that I was cautious all year and the S&P 500 is up 1% tells me I was on the right page.  While my yearly goal is to try to outperform the S&P 500, the purpose of my market timing is to be heavily invested in stocks when we are in a strong longer term bull market as we had in 2003, and to avoid stocks when things aren't looking quite right.  

Now I believe we are closing in on that next bull market rally.  My antennae are on the look out for buying opportunities to take an aggressive stance into 2006.  My guess is that it could still take a month or so before that final opportunity but a possible plan could be to slowly buy in during market weakness because we don't know exactly when the best opportunity will come. 

Why the change?  As the market has dropped since late July, both the monetary conditions and the psychology picture have improved.  Not quite to the point where I would like it to be, but there has been significant improvement. 

Jason Goepfort at sentimentrader.com listed three stats recently that I found interesting:

- While some of the more widely-watched investor sentiment surveys did not show excessive and sustained pessimism after the recent hurricane disasters, the UBS Index of Investor Optimism did.  The survey is showing one of its lowest optimism readings since its inception in 1996, behind only mid-October 2002, and mid-February and mid-March 2003.

- For the week ended September 16th, the NYSE reported this weekend that specialists on that exchange accounted for only 14% of all short sales - the lowest percentage in at least 63 years. [These specialist are considered "smart money"]

- Assets in the Rydex funds showed a huge shift from the bearish S&P and Nasdaq index funds to the bullish - to the tune of $238 million, or more than 4% of total index assets. That is the largest shift in dollar commitments since May 2004. Interestingly, if we look at the dates of the recent largest bullish dollar shifts, we come up with 04/02/03, 10/28/03, 11/24/03 and 05/25/04. Each of those corresponded with a time the broader market was emerging out of a dip/consolidation area and served as a kind of "kick off" to further price gains.

If you jumped head first into stocks right now and checked your account in a year or two, you would likely be very please with the results.  Since I watch the market on a daily basis I am going to try to do a little more fine tuning and pick my spots to buy.  Like I said, I'm thinking some time in October or November we will get there.  Of course your investment style will vary from mine so do what is comfortable for you.

That's all for today.  Currently 100% G fund.  Thanks for reading.  Don't forget to check out what RevShark is saying.  His commentary is also updated daily.