What’s your strategy for this market?

This is a very interesting time for the market.  There are periods during the course of the year when there just isn’t very much going on in the stock market.  Times when the indicators are in neutral territory and the indices seem stuck in a rut doing very little.  Those are the times that it isn’t as easy to come up with a daily market commentary because there just isn’t much to say that hasn’t already been said.  This is not one of those times. 

The short term is very muddled to me right now, but not because the market is in a rut.  On the contrary, there is a lot happening and I believe we could see the indices move radically in the coming days and weeks.  The problem is I find myself ignorant of the direction that is going to be.  This is where your strategy comes in.

I have my short, long, and intermediate term indicators that I watch that help me put the pieces together.  As I mentioned, neutral readings make it tough to call the market and at that point the market doesn’t usually doesn’t do much of anything.  But we don’t have neutral readings now, we have extremes pointing in both directions and that is what is making it interesting.

This morning we will be getting the December jobs report and because investors seem to be leaning heavily one way or the other, we could see some explosive action if that report is not aligned with the estimates.  Anything too low and it looks like the economy is slowing, but that is good for the interest rate quandary.  Anything too high would make it appear the economy is moving too fast and the Fed could take that as a sign to keep pressure on rates.  That’s why the market gets volatile after a jobs report. 

Let’s take a look at some of the data.  It appears to be conflicting as many are giving buy signals and others sell signals. 

First thing is the recent market action itself.  This week’s strength has been impressive and when you see a jump up as we have had, it tends to continue longer than you’d think.  That is because many people miss that first big move and they wait for a pullback to buy, which keeps the indices afloat.  We saw that a few times in 2005. 

On the flip side, the indices are moving higher but not enough stocks have been participating to make it completely healthy.  Only 35 stocks in the S&P 500 made a new 52 week high on Thursday.  35 of 500 on a day when the S&P 500 index itself made another 4 ½ year high?  Maybe that number will grow from here but so far that is a divergence.  Compare that to other periods over the past few years.


                                   Chart provided courtesy of www.decisionpoint.com

It could be premature to call this a problem since the number of highs has finally started to grow after December’s lethargic readings.

I mentioned the AAII Investor Sentiment Survey yesterday.  For any new readers out there, this survey is a contrarian indicator in that when the numbers hit extreme levels, the market tends to move the other way.  So if too many people are bearish, or believe the market is going to fall, it tends to stabilize and move higher.  You usually see a bearish number at or above 40% when the market has been tumbling for a while.  Here we are making new highs on the S&P 500 this week and the herd is more bearish now than it has been since the October lows. 


                                     Chart provided courtesy of www.decisionpoint.com

This is usually a good sign for the market but I find this behavior rather out of the ordinary.  The only explanation I can think of is that even though the indices are moving higher, it is possible that people are not seeing gains in their portfolios.  Like the new highs list, not all stocks seem to be participating.  Maybe this is causing the concern out there.  So this 40% bears / 29% bulls is usually a good thing for the market.  It is just coming at a strange time and I’m not sure what to make of it. 

The 10-day moving average of the ARMs index is also acting rather strangely.  Readings in the .70 to .90 range or lower, tend to be near market tops.  Readings between 1.20 and 1.30 or higher, tell us the market is oversold and close to a buy signals.  Here we are near 4 year highs and the reading is 1.19.  Something you would normally see after a prolonged market drop.  I’m not sure what to make of it.

The NYSE overbought/oversold indicator is the most overbought it has been since late summer.  This isn’t jiving with those other indicators.  This happens when the market needs a break.

Then we have the OEX put/call ratio we talked about the other day which is telling us the smart money is currently very bullish. 

The intermediate term psychology and monetary condition indicators are telling us to be cautious.  These are the two main reasons I have been on the sidelines.  I’m waiting for them to repair themselves.  And that likely won’t happen until the market takes a major rest. 

Since many folks reading this follow my lead, I would rather err on the side of being too cautious until those intermediate term indicators are in better shape.  The shorter term indicators are better for predicting day to day action, but right now they seem a bit confused.  It is these intermediate term indicators that keep us in safe mode when the market finds itself in trouble.  If they are right, we will preserve our capital until a higher odds buy signal is flashed.  If they are wrong, we miss some gains but at least our accounts are protected from loss.

That’s all for today.  Currently 50% G, 50% F.  Have a great weekend.