The wall of worry

It is said that markets climb a wall of worry.  In other words when the market is making gains there are always reasons it could fall back down.  Right now inevitable interest rate hikes, the war in Iraq, the threat of terrorism, and the presidential race all add to today's wall of worry.  None of those themselves have concerned me.  What I I pay attention to are my indicators.  Of course this relates to my short term approach.  Since I have been hiding most of the year in the G fund, I feel very exposed right now, even with only 65% of my account in stocks.  I am not real comfortable being in the market at the moment nor have I been all year, and I am usually very aggressive.  But my comfort level is not one of my indicators.  My worry could be taken as a positive sign.

The last few days the market seems to be slowly gaining ground even though we have those worries I mentioned materializing every day, all day.  Those worries do affect the day to day wiggles in the market but it is the earnings, the economy, psychology, stock valuation and monetary conditions that really drive the market direction.  That is why my longer term outlook is so positive while my short term outlook changes regularly. 

I can't tell you which direction the next 1 or 2% move will be.  But I am very confident that the next 20% move will be to the upside.  It's the next 5 to 10% move I am worried about right now.  I usually have an inclination of which direction that would be, but right now it's as foggy as the 1 or 2%.  Until we break above this year's highs (about 1160 on the S&P 500) the choppy consolidation continues.  For this reason I will continue making frequent transfers to protect my account when my indicators get me nervous.  Right or wrong, I still believe preserving your capital is more important than missing out on gains.  That is even more true if you are getting closer to retirement and have amassed a good size balance.  Once we break out of this consolidation you will see a new attitude from me.  I will be more willing to ride out some of the smaller bumps in the road.  We are in a tough market condition and I am in protection mode.

This AAII investor sentiment survey chart is what has me concerned at the moment.

                                    Charts provided courtesy of  www.decisionpoint.com 

This poll shows 64% of the people surveyed are bullish, and only 14% are bearish.  Only a very strong market can survive these kind of numbers.  The 14% bearish is the lowest since early March, just before the big sell off.  The 64% bullish is the highest since mid-January.  Remember these are contrarian indicators.  The more people who are bullish (those thinking the market will go up) the more nervous I get.  "The herd" is usually wrong at market turning points. 

As I said, markets climb a wall of worry.  This chart indicates there is not too much worry out there right now.  Because of this I have a finger on the "get out" trigger on any signs of weakness.  I will keep watching the prior day's low price as a point of concern.  In other words, if the S&P 500 goes below yesterday's low of 1129.87 at any time today, I will take that as a potential short term change in trend to the downside.  That may get me back into the G fund.  Until that happens however, I will stay in stocks and possibly put my other 35% to work.

That's all for today.  Currently 35% G, 25% C, 15% S and 25% I fund.  Alan Greenspan is testifying before the Senate Banking Committee today.  That should shake thinks up a bi today.  See you tomorrow. or on the message board.

----------------------------------------------------------------------------------------------------------------
Would you like to be on our email alert list?  We will send you an email when there is a change to our asset allocation or market outlook.  Input your email address in the form on the top right of any page and you're in.  Your email address will never be given out.  read our Privacy policy. More details below **.

Like what you're reading?  Tell a Friend about us.