Market Comments
 
January 6, 2005
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Today's Comments (Short Term Outlook)
The next few days are important.

I believe the reason the market hasn't rebounded yet is because so many people expect it to.  You have to think like the minority.  Options speculators are buying calls at 2.5 times the rate of puts.  That is not a great sign.  Options buyers are considered less sophisticated and are usually wrong near market tops and bottoms.  Once the market is punished enough, these options traders will start buying more puts and we'll know the pullback is over.

I really wish it was what that easy but of course they can be correct at times.  This recent drop is of some concern and I'd rather wait it until I see something like extreme oversold levels or the market actually put in a high volume reversal. 

Jason Goepfert at Sentimentrader.com did his usual interesting research and with his permission I'd that I'd like to share with you.  The following criteria was met 12 times over the past 35 years...

 - The S&P had just made a new 52-week high no more than 5 days ago,
- It had just sold off at least 2% over the prior 3 days, and…
- The Investor’s Intelligence survey reported at least 55% bulls.

While there was no real indication of direction as the results were split, the short term seemed to dictate the action of the next couple of months.

      When the S&P was negative after 3 days, then after 60 days this is how it did:

Percentage of time positive:  33%

Average return:  -6%

Largest gain:  +6%

Largest loss:  -26%

When the S&P was positive after 3 days, then after 60 days this is how it did:

Percentage of time positive:  100%

Average return:  +6%

Largest gain:  +11%

Largest loss:  n/a

So if the S&P can manage a gain over the next 3 trading days, it looks pretty good for a continued rally.  If the S&P is down from here after next Monday's close, there is a 67% chance that the next two months will be down.  And look at the largest downside loss, 26%.

So let's watch and wait.  If the market sells off real hard again in the morning, I may get more aggressively invested in stocks.  That may be the best bet.  If we open to the upside, we could see another sell off by the close as we saw Wednesday.  But we have to keep an eye on next Monday's close.

That's all for today.  Currently 40% G, 30% C, 15% S and 15% I fund.  See you tomorrow.

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