Looking for clues

The market experienced a decent pullback early last week, only to rally later on.  For the week the S&P 500 was only down slightly.  The choppy recent action has actually brought the short term indicators back into more of a neutral zone, favoring neither strength nor weakness in the short term. 

The longer term picture does continue to tell us to be cautious.  While the "smart money" indicators are giving some mixed signals, the "dumb money" is still extremely bullish (believe the market will continue to rise.)  This dumb money is not who we like to follow, but it is not wise to always go against them.  They are not always wrong.  They just tend to be wrong at market extremes, when the market is about to turn down from a high, or up from a low.  So how do we know when the market is near an extreme?  That's where the indicators come in.

The Rydex Asset Ratio determines how bullish or bearish the herd (dumb money) really is by telling us what they are doing with their money.  This ratio is calculated by adding together the amount of assets currently invested in bearish funds (funds that are betting the market is going to go down), plus assets sitting in cash or money market funds.  That total is then divided by the amount of assets in bullish funds (funds that are betting the market will go higher.)

This is different from sentiment surveys in that it doesn't tell us what the herd says it is doing.  It tells us what they are actually doing with their money.  A better, more accurate reading of sentiment.

A reading of 1.00 would indicate that there is as much money in bullish Rydex funds as there is in bearish funds plus cash.  Right now the reading for this ratio is .52 which means there is about twice as many assets in bullish funds than the bearish/cash funds. That is the highest reading since the end of 2004. 


                                  Chart provided courtesy of www.decisionpoint.com

You can see in the red circled areas what happened during the October market low.  There was more money in the bearish/cash funds than in the bullish funds.  The opposite of what we see now.  This is because the herd gets more bearish at market lows and more bullish at market tops.  The opposite of how you'd want to time the market.  This current .52 ratio is telling us we are near a market extreme.  Either that or the dumb money is getting smarter.

NYSE New Highs:


                                  Chart provided courtesy of www.decisionpoint.com

Here is another look at the recent NYSE new highs.  While we had an impressive 197 stocks on the NYSE (New York Stock Exchange) make a new 52-week high on Friday, this number is well off the almost 500 new highs made in early July.  Here we have the NYSE index up quite significantly since early July yet fewer stocks have made new highs.  It has perked up quite a bit since the October lows, but it appears fewer stocks are participating in this rally than last summer's rally.

The I fund is doing well but the dollar is still bullish and above support levels.  This means the I fund continues to under perform the very strong indices of the international markets.  The Japanese market has been flying off the charts for several months now.  While we've seen some major rallies in this index in the past, it can be quite volatile and could be in a risky position.  If we can see a pullback there, then get a top in the dollar, the I fund could really take off.

Bonds are still in no man's land.  They are above the recent lows but still now acting very well.  While I'd like to take advantage of the oversold condition in bonds, I'm still in wait and see mode.

I get a lot of questions about the new 2006 TSP limits.  Here is some recent information from TSP.gov website:

• Percentage of pay limits to be eliminated — Beginning in January 2006, there will be no limit on the percentage of pay you can contribute to the TSP. However, your total contributions for the year may not exceed the IRS limit of $15,000.

• Catch-up contributions — If you are — or will become — age 50 or older during 2006 and will be contributing the maximum amount in regular TSP contributions, you can make additional catch-up contributions of up to $5,000 next year. You can sign up for catch-up contributions at any time, but you must make a new election for each calendar year. Use Form TSP-1-C (for civilians) or Form TSP-U-1-C (for members of the uniformed services). Check with your agency or service TSP representative for guidance about when to submit your election.
   
• No more TSP open seasons — Remember, TSP open seasons have been eliminated. So you can now enroll or change your contribution amount at any time.

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