Thursday’s tragedy made for an interesting day for stocks.

Another horrible tragedy reminds us why we are fighting a war against an enemy that has no regard for human life.  It is nauseating and I want to take this time to thank all of our military folks reading this who are helping our cause, fighting for our freedom.  Spain may have cowered when they were attacked but I have a feeling the British will not take this one sitting down.

While I am looking for, and welcoming a pullback in the market at this time, it was refreshing to see the market end the day positively after the actions of a maniacal group who are attacking capitalistic societies.  The rise in the indices yesterday was a nice way for our economy to snub its nose at their efforts.   

It may seems a little narcissistic to figure out how this will affect our TSP accounts but that is what I am here for, and I know you are not reading this to get my political views, but rather to hear how this may affect your account, so here I go...

We can analyze Thursday’s market action a million ways.  We can say it was a great turnaround day with a 125 point rally in the Dow from the early low into the close.   We could say it was a washout of the pessimism and the start to a new leg up.  We could say it was merely a 30 point gain that followed the prior day’s 100 point drop.  However you interpret it, the outside market influences have not changed so I don’t see it as significant.  It was likely just a reversal of an early overreaction, which in turned caught some bears on the wrong side of a rally causing them to cover (buy back short positions) which helped push the indices higher.  Bottom line, the indices broke down from the short term consolidation and I believe the late strength will be a short term trap that will catch the bulls off guard again.  

Why?  One reason is the new AAII Investor Sentiment Survey which came out yesterday, the day following a 100 point loss in the Dow.  There are now only 20% bears.  If we are indeed in the midst of a pullback, that number will have to get closer to 40% before we see a bottom.  Still too much bullishness from the herd.

That said, I still believe the pullback could end quickly if we could get a decent sell off for a few days.  It may not be “the bottom” of this summer’s pullback, but we may see a short term buying opportunity if the market can put a little more fear into the over optimistic investors.  Two indicators that may give us the green light are the McClellan Oscillator and the 10-day moving average of the ARMS index.

A move by the McClellan Oscillator to the -150 to -200 area could give us a temporary green light.  I like to use the 21-day moving average of the McClellan Oscillator to find THE bottom, but the daily reading will find short term buy and sell points as well.  Right now it is near 0 but a move to -150 may only take a week or two. 


                                 Chart provided courtesy of www.decisionpoint.com 

The 10-day moving average of the ARMS index is also a good indicator to help tell us when we are close to seeing the selling or buying pressure ease.  A move to 1.30 to 1.50 would tell me it’s time to think about getting back into stocks.  Currently the indicator is down to 1.23 (notice the higher numbers are on the bottom) .  Close, but not quite there yet.  In the chart below I indicate when the 10-day moving average went over 1.20 but before it hit 1.30 or more.  You can see the market almost always had more downside before bottoming. 



                              Chart provided courtesy of www.decisionpoint.com 

It's rare that the market suffers much more damage when this indicator gets much higher than 1.30.  The obvious exception above was last July and August when it went over 1.70 so it is not a slam dunk.

Again, it would only take a few good down days to get these strong indicators into shape, and of course any sell off would certainly get the herd’s attention and hike that 20% bearish sentiment back over 35%. 

That's all for today.  Currently 100% G fund.  Have a good weekend.