July is my nemesis. 

Last year I was very bullish for the second half of the year (2004).  In early July of 2004 I was saying, "Get in stocks.  A big rally is coming!"  If you were with me back then you know the market made me eat crow for about six weeks while the market pulled back through July and into August.  The market did bottom in mid-August and the year ended with a 15% rally.  You can see the problem.  A 15% rally on the heels of a six week pullback.  Being early hurt but staying the course paid off.

Do you remember me talking about the difficult time I had during July and August last year?  By mid-August the emails were getting brutal and deservedly so.  And boy was everyone bearish, calling for the next crash, depression, whatever.  It is very difficult being very bullish at the bottom when the market has worn down investors for months and everything is looking its worst.  This year we're seeing the opposite. 

The market continues to move up and my bearish talk is being considered nonsense by some.  It has been almost six weeks since I've gone to my 100% G fund allocation.  During that time we did see a quick pullback that ended the day of the July 7th terrorist attack in London, but the market has since regained that loss.  Did I miss it?  Is this the next leg up or are we still due for more consolidating?

That little pullback a couple of weeks ago did little for the intermediate term indicators, meaning I am still expecting another round of weakness.  A pullback that will put the herd closer to the negativity we saw last summer.  A pullback that will send the overbought/oversold indicator deep into oversold territory.  A pullback that will bring the 10-day moving average of the ARMS index (currently 1.02) into the 1.30 to 1.50 buy zone.  A sell off that will get the bearish percentage reaching for 40% (currently 27%).  Weakness that will get the small time options traders to stop buying calls (bets that the market will go higher) at all time high ratios compared to puts (bets the market will go down).  I could go on.

Of course there are always reasons to be on the other side (bullish) as well.  It's never cut and dried.  Jason Goepfert at sentimentrader.com tells us his pros and cons for the current market situation.  He says;

I don’t have a real clear view right now, and at these types of times I prefer to make a “pro” and “con” list for a rally.

PROS (reasons for a rally):

• Our Smart Money Confidence remains near 60%, which continues to suggest that any correction we do see is just a blip within an overall uptrend.
• Only 11% of the assets in Rydex sector funds are concentrated in the most aggressive groups.  A figure between 20% - 30% would suggest a top, and the current concentration is more consistent with a low.
• Long-term indicators like short interest (on the Nasdaq) and “available cash” in brokerage accounts are still supportive of a longer-term rise in market prices.

CONS (reasons for a decline):

• Our Dumb Money Confidence is hovering around 60% - not “extreme” per se, but showing enough overall enthusiasm that future returns have typically been muted.

• Small options traders, those trading 10 contracts or less, bought to open an exceedingly large number of call options last week (an unhealthy sign of speculation).  Over the past five years, only two weeks have shown more call-buying by those traders:  July 21, 2000 and January 16, 2004.

• Large commercial traders in the S&P, NDX and Dow futures contracts increased the nominal dollar value of their net short positions last week by $5.5 billion, the largest negative shift in eight months.

• Our AIM model of investor opinions is at a level consistent with market tops, with 2003 being a rare exception.

Neither list makes me particularly excited about being invested on either the long or short side.  - Jason Goepfert

The dollar is looking a little "toppy" lately and if I were going to play stocks, I'd be leaning toward the I fund, expecting a little pullback in the dollar.


                              Chart provided courtesy of www.decisionpoint.com

I haven't talked about it for some time as I have been bullish on the dollar this year and thus bearish on the I fund.  Other than a couple of small shots here and there, I have pretty much avoided the I fund the entire year.  The dollar has rallied quite nicely since late last  year and could use a rest.  If we ever get that pullback in stocks I may use the I fund at least as much as the C and S funds. 

So come on July.  Get out of the way.  You are making a mockery of my indicators again this year, as you did last year. 

That's all for today.  Currently 100% G fund.  Thanks for reading.