Complacent?  Fasten your seatbelts.

We have had some nice trading opportunities lately as the market moves about in an up and down fashion.  It doesn't seem like it but if you are a long term trader you will notice that the S&P 500 is only up just over 1% since late November.

Is the S&P going to succeed in breaking out?  We saw two failed breakouts last week as each attempt above 1294 has pulled back into the trading range.


                                     Chart provided courtesy of www.decisionpoint.com

It may sound as if I keep looking at the glass as half empty rather than half full, but I can't shake the feeling (based on indicators, not really a feeling) that we need to see some selling before we can make a real push higher.  I'm not talking about the next 1 or 2% move.  That could be up or down.  But I'm more concerned more about the next 5 to 10% move.  If we want to see a big 2006, one that gives us a chance at a 20% gain or more for the year, I still believe we need some kind of washout panic sell off to get sentiment in better shape.  I had thought February was going to give us that chance but no to be.

I had mentioned complacency in the title.  While the market hasn't been on fire since 2003, there has not really been any damage done either.  Have I been too conservative the past three months?  I hadn't realized this but we have not experienced a 10% drop from a six month high in three years now.  According to our friend Jason Goepfert at sentimentrader.com, that has only happened three other times; 1965, 1987 and 1994.  Each time the market gave one more short term push higher before seeing a 20%, 27%, and 7% sell off shortly thereafter respectively.  So if history repeats itself our complacency may excite us into jumping in on the next breakout, only to have the market pull the rug out from under us.

Volatility has been quite low lately (and that is part of the complacency concern - see the VIX) but Friday was actually rather exciting.  Frustrating as heck, but exciting.  I based my 35% interfund transfer into the S fund on Friday's early morning weakness.  I am trying to be nimble but the market action may make it impossible for our TSP accounts because of the deadline. 

At 11:30 ET on Friday I decided to move something into the S fund based on the early weakness.  By the time the transfer was made and I had sent out the email alerts, the Dow started to move back to even.  By 2:00 PM the Dow had gained over 120 points since I acted on "the weakness" and I had felt I was missing the rally I was trying to catch this week.  Good call but the market is moving too quickly.  Then the Dow shed 85 point from that point into the close, ending the day in the red.  That helps but why all the selling by the "smart" late money?

          

If you are a day trader that could have been a very profitable day.  But we can't act that quickly and it is one reason why I have tried to look more at the intermediate term picture during the past year.  Sure I have made some short term moves here and there, but this illustrates why we probably shouldn't attempt it often.  But to put things into perspective, 35% invested in stocks is still quite conservative.  I am hoping to catch a small gain before going back into my shell again.

Again I think we may see trouble in the future but I am not ruling out pockets of strength, particularly if we keep moving in this trading range.  I showed you the Russell 2000 small cap index chart last week.  Here is the Wilshire 4500, our S fund tracking index, and you can see it is also in a precarious position trading at or near the higher end of the rising trend channel. 


                                      Chart provided courtesy of www.decisionpoint.com

So even if we do see some short term strength, trend lines, four year cycles, and the three year 10% pullback history tell us we may want to remain on our toes for a while.  There's a longer term buying opportunity out there somewhere.  How long do you think it will take to turn the complacency into fear?  We have a lot of work to do to get there.

That’s all for today.  Currently 65 % G, 35% S fund.  Thanks for reading.  See you tomorrow.
 

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