This is getting rough.

Thursday gave us another day without an end of year rally.  As defensive as I have been over the past several months, it is frustrating to jump into stocks during the strongest stretch of the year, only to see the indexes flounder.  I would have been better of staying in the F fund. 

But that’s not the bad part.  The bad part is that we will be heading into the new year without an overbought rally, and without a sell off.  Where does that leave us?  The short term indicators are no longer overbought and the indexes have consolidated for a few weeks now.  Is the market going to try to make another short term push higher next week after missing its chance this week?  Things are getting ugly but it just might do that to confuse investors.  Remember, as we talked about yesterday, early January is also very strong historically.

I would sure hate to miss a rally after taking a shot at stocks and failing (so far) this week.  But I am ready to jump out of stocks again based on the longer term indicators telling us we need a major pullback here.  And also because things are looking eerily similar to last year where early daily gains were given up by the close during the last few trading days of December.  Then we sold off out of the gate in January.  Things rarely play out exactly as they did in the past and it would be too easy to assume they will, but I’m not sure how much strength this market has in it.

I keep hearing that mutual funds and companies have a lot of cash on hand which should fuel a January rally.  But if that is the case, why weren’t they putting it to use the past couple of weeks?  Perhaps they are waiting for a better buying opportunity as well?

The Rydex bearish and money market funds are telling a different story however.  They seem to indicate that there is less money on the sidelines and in bearish funds than normal.  We are just off the 2005 highs of low cash and low bearish funds compared to bullish funds.  See the chart below:


                             Chart provided courtesy of www.decisionpoint.com

That ratio indicator (blue line in bottom chart) appears to be peaking and ready to move down.  It does that when investors decide to take their money out of stock fund, not add to stock funds.  This is a contrarian indicator that tells us investors are near peak bullishness.  That is a negative for stocks.


So 2005 is almost over and looking back, it was an interesting year - very similar to 2004 in a way.  They were two very tough years for trading unless you fought the indicators and stayed aggressive in stocks.  Sometimes that can burn you and other times reward you. 

Small cap and international stocks did well but it wasn’t really an outstanding year for the S&P 500 which is currently up 3.50% with one day to go (the C fund is up 5.4%), or the Dow which is actually only up 2 points or 0.02% in 2005.  It is hard to believe that if the Dow is down more than 2 points today, it will end the year in negative territory.  You can see below that it spent the vast majority of the year below the break even point (green line).


                          Chart provided courtesy of www.decisionpoint.com


As most of you know, we spent much of 2005 in defensive mode because our indicators were telling us that there could be some trouble.  They had their ups and downs but even though no real harm was done to stocks, those returns I mentioned above tell us we were on the right track being on the cautious side.  The G fund was up 4.40% by comparison.  One bad move in late October cost us some gains but we still feel we approached 2005 correctly.  Things will be different in 2006 - Just as soon as we get that confounded pullback.  

The key to timing the market (not day trading) is to play defense when things are not looking right, and to get very aggressive when they are.  Some of our members were very successful being active this year, and the aggressive inactive account is up about 9%.  In a year like 2005, and 2004 for that matter, diversifying usually pays off.  It’s the 30% plus up or down years that really benefit the market timers.

I plan to make a move very soon.  Probably today.  I will move some or all of my account out of the S fund and back into the F fund.  I will likely make the final decision within an hour of the trading deadline.  Watch for an email alert.

I have updated the Longer Term Outlook Allocation for 2006.  See the bottom of the allocation page.  Ironically, this "buy and hold" type of allocation will change once we see a pullback in 2006.  Then, rather than waiting for July, I expect to ride the year out in a 100% stock allocation.  But first, I am getting a bit more defensive.

Today's tip:  Use your COLA raise to painlessly increase your TSP contributions. 

That's all for today.  Currently 100% S fund but that is going to change.  Thanks for reading.