Place your bets

If Wednesday didn’t send you for a loop then surely Thursday did.  I didn’t know what the market would do on Thursday but I was saying in yesterday's comments that jumping into the stock funds after a strong morning rally might have been, well not a mistake, but not a great way to make your allocation decisions.  It turns out that it paid off for anyone who did just that, but they were given another test before the deadline on Thursday.  Let’s review:

Wednesday morning the Dow rallied 115 points before the noon ET deadline.  It then lost over 130 points to end the day down 21.  I made the assumption that those who jumped into stocks may not have liked what they saw.

Thursday morning the Dow gained about 80 points early, and then just as quickly gave it all back, all before the noon deadline.  The temptation for anyone trying to time the short term, day to day action would be to bail out of stocks as things looked bleak.  But once again the market pulled a Houdini and came right back ending the day up 91 points.  The high on the day.  Pretty impressive. 

       

Has it been volatile enough for you?  This could be fun if we were able to jump in and out of stock funds all day.   But since we can’t, I think we have to take a step back and look at the larger picture.  Sure you can get lucky some days.  And sure some people have a better instinct for timing and may do better trading than others, but since I’m not one of them I have to take the ups and downs while sticking to my plan.

The market has come close to erasing the oversold conditions we saw earlier in the week.  The short term indicators are more neutral than anything.  The longer term is still overbought.  So, I wait.

Oil made another new high Thursday and the dollar is falling closer to some support levels.  It is possible the dollar could keep falling.  Many investors are betting on that based on the Rydex Funds that follow the dollar.  That may be a contrarian signal (i.e.: to go against the herd) but we’ll have to wait and see.  If support does not hold, you may want to stick with the I Fund a while longer if you are in stocks already.  If it appears the dollar is going to hold support and begin to rally again, you may want to back off of the I Fund some.

If there was anything negative yesterday, other than record oil prices, it's that there was not a higher high over the prior day.  There was a higher low however.  It was what is called an "inside day", which is usually a continuation pattern or indicator meaning the recent trend should continue.  (An "outside day" is a trend reversing indicator).  The question is, do you think the trend is now down, or is it still up?

            Chart provided courtesy of www.decisionpoint.com

With the help of Jason Goepfert at www.sentimentrader.com, here is how the recent Investor’s Intelligence sentiment survey played out. 

"Investor's Intelligence reported 59.1% of its population as being bullish (up from 57.3% last week) and 19.3% as being bearish (down from 22.5% last week). This data is finally at a point where we need to become worried about having formed a longer-term market top. Over the entire history of this data, such extreme bullishness has lead to significant under-performance in the weeks ahead. Even just looking at the bull market since 2003, there have been 15 weeks with bullishness in the survey this high. 4 weeks later, the S&P 500 was higher only 2 times, and the average return was -1.8%. Even 8 weeks later, still only 4 of the weeks were positive and the average return was still negative, which is quite a feat when the average 8-week period was positive 70% of the time with a return of +2.3%." - Jason Goepfert

Interestingly, the new AAII Investor Sentiment Survey that we usually talk about showed the opposite; A decline in bulls and an increase in bears.  Bulls were 40%, bears 29%.  Last week it was 48%, 26% respectively.  Have you taken this week's TSP Talk survey?

The volatility is in full swing and getting a good grasp on the market action may be tough.  Sometimes it is better to look away for a few days and see how things play out.  If you seem to be in rhythm with the market, stick with it. 

That's all for today.  Currently 100% G fund.  Thanks for reading and have a great weekend.