There is a lot of uncertainty out there right now. I am hearing very strong opinions, and seeing technical readings on both sides of the bull - bear issue and making a call right now can make or break a prognosticator. If I call this right, I will make believers out of many who are skeptical of the market timing philosophy. If I call it wrong, many folks will look elsewhere for market info. The truth is, no one knows what is going to happen. All we can do is make educated guesses and some of us will be right, and others wrong. In uncertain times like this, I'll try to get too stubborn and let the market guide the way.
Being that the short-term direction appears to be a toss up leads me to believe that we may in for a period of choppy market action where we will want to go with the flow, buying oversold pullbacks and selling overbought rallies, until we see if the uptrend is going to continue or until the trend reverses down. It could be that being fully invested or fully on the sidelines will give us the same results because playing a choppy market isn't as easy as it may appear when you look at an old chart of past choppiness.
I am seeing signs that we may be ready, or just about ready to head back up which is why I went back to 100% stocks for today (50% C, 25% S and 25% I). Even if I am right, we could rally a few days and come right down so I don't want to get married to a particular position. Until I see something a little more concrete, I will stay flexible. In the longer term market comments you will notice I got just a bit more cautious putting a little more G fund across the allocation models. The past two years gave the market some attractive gains and it doesn't hurt to tighten up and see what happens.
Back to the short term. As I said, I see a potential rally but that doesn't mean it will start today. I'm not that smart to pick the exact day. I'm just more willing to take a chance now that we have seen a decent pullback last week. So if the market goes down, it may just be another buying opportunity if you didn't buy already. Sitting on the sidelines may be a good idea, but a big reversal day (one that starts down and ends the day higher) will be tough to play with our TSP one to two day delay. But don't get too discourage if you are out and the market rallies. Many times we get a rally, only to see a quick test of the low made days earlier. I'll mark a few points on this chart of the S&P 500 to illustrate what I mean.
Chart provided courtesy of www.decisonpoint.com
You can see that several times in early 2004 when the market fell sharply, a little rally started but the index came right back down to, or just below, the initial low. Also, if we are in store for another consolidation period similar to what we saw in 2004, you can see the market took months to for a top and there were sharp rallies each time the market sold off.
Friday I talked about the AAII Sentiment Survey poll where people are "saying" that they are getting more bearish (a good sign for the market). The chart below is a little better indication of true sentiment as it shows us not what people are saying, but what they are doing. The Rydex Asset Ratio tells us if more people are putting money into aggressive mutual funds or if they are running to safer funds. On the far right in the bottom indicator the blue line is falling sharply. When it is falling it means assets are being put into safe funds at a greater rate than the aggressive. I marked in red past instances where the flow from aggressive to safe mutual funds fell to the point where it went below the Bollinger Bands (green lines). When this happened the market tended to rally more often than not.
Chart provided courtesy of
www.decisonpoint.com
One more thing I want to talk about quickly. The
"dumb money" indicators show that less sophisticated investors and
traders are getting bearish, which as we talked about is usually a
bullish or a good sign for the market. But indicators show that
the "smart money" commercial traders are also acting a bit nervous.
Usually a not a good sign.
So it's not an easy call. As you know I decided to get fully
invested. The market may not rally today or tomorrow, but my guess
is we will see some sort of a rally soon. You may not feel as
comfortable with that so please stay within your risk tolerance.
That's all for today. Currently 50% C, 25% S, 25% I
fund. See you tomorrow.
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