Same old song for stocks.  Bonds get banged up.

Yesterday saw a 50 point gain in the Dow turn into a small loss.  The pattern continues.  Sellers are stepping in when the prices go up, and buyers are keeping the market from dropping too far.  At one point yesterday, the S&P 500 actually dropped below last Friday's low before a late bounce took it back above. 


                                Chart provided courtesy of www.decisionpoint.com

I hate to bore you with the same old story but the market continues its flat to slightly higher move in what I anticipate will lead to another test and break of last Friday’s lows.  While that sounds like my usual negative bearish jargon it is said with the optimistic view that this drop will do enough to bring the intermediate term indicators back to a buy zone.

I am still expecting big things for stocks in 2006 but I don’t want to commit until the indicators wave the green flag.  Sure stocks could just continue higher, but the odds of a successful rally move up a notch when at least two of the psychology, valuation, and monetary condition indicators are in positive mode.  The psychology and monetary conditions have been the holdouts and one more push down (I know I’ve been saying this for a long time) will likely move the psychology leg back into positive mode.  The monetary conditions will certainly improve when the Fed stops raising rates.  There is an outside chance that could happen next week.  If not, just the mention of a foreseeable end to rate hikes may be enough.

Yesterday I said if the technical picture for bonds showed any cracks that I would flee to the G fund.  Well, bonds had a very ugly day yesterday, breaking below the recent short term support.  It isn't a complete technical breakdown but as I mentioned it is getting tougher to justify being in the F fund from a fundamental standpoint.  I will give them a day or so to make a little recovery and use any strength in bonds to move our safe haven money from F to the G fund.  I anticipate the G fund paying the next penny gain on the 30th. 


                                 Chart provided courtesy of www.decisionpoint.com

With the dollar breaking through support the other day, the I fund may be a better play in the short term if you have a desire to be in stocks.  Since the dollar has such a major impact on the I fund, I tend to focus more on that and the strength of U.S. stocks rather than the actually strength or weakness of international stocks.  I just don’t know that much about foreign markets and economies to try to trade that way.  My simplistic view is that international stocks move in enough sympathy with U.S. stocks that I gauge whether or not to be in the I fund by whether or not to be in U.S. stocks.  The action of the dollar then tells me how much to participate in the I fund.

Same with small caps.  I like to look at small cap sentiment to decide how much to put into the S fund WHEN I believe all U.S. stocks are ready to rally.  Whether in the S or I fund, I anticipate more volatility (higher gains or deeper losses) when these funds move.

That’s all for today.  Currently 100% F but running out of patience with bonds.  I am also getting impatient being out of stocks but I will wait for the psychology leg to improve before plunging in.   Thanks for reading.


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