More good news - but the short term gets murky

The CPI report we talked about yesterday came in at benign levels easing inflation worries again and the market responded quite positively.  I'd like to think that I knew this was coming, but I had no idea.  But our indicators knew, or at least they were hinting it.

Back in mid-June we went from a 100% G fund allocation to a much more aggressive allocation.  Why?  Did we know the market was going to rally?  I didn't, but our indicators started to flash signs that strength was ahead.  The timing of the indicators is not always the greatest, but they are good intermediate to long-term indicators that told us the next 6 to 12 months should be good for stocks. 

What I do at that point is change my strategy.  My discipline when I get this longer-term bullish signal is to keep at least 50% or more of my account in the stock funds at all time, until the indicators tell us differently. 

I believe this discipline made me some money this week as the shorter-term indicators were getting less attractive and I have no doubt that my all or nothing personality would have had me closer to a 100% G fund allocation instead of having 70% in the stock funds as I do now. 

After yesterday's second consecutive gap up opening that held up, I am seeing more short-term signs of potential trouble as the indicators are getting quite overbought.  For that reason I may make a short-term interfund transfer into a more defensive allocation.  Here are some reasons why:

Wait!  Before I go on, I want you buy and hold, and less active investors to talk amongst yourselves.  This does not pertain to you.  If we do get a pullback, it could be quick and since the market is looking very good for the long-term, you will not want to let this data change your bullish outlook.  OK, have you looked away?  Good - here goes...

Seasonality:  Other than the last day of the month, the second half of August is historically performs well below average.  Today is the 13th trading day in August.


                                Chart provided courtesy of www.sentimentrader.com

Overbought:  A strong market can sometimes push aside extreme overbought readings, but why take the chance?  We have some nice recent gains to protect and the NYSE is now more overbought than any time this year except for early January and early July.


                                Charts provided courtesy of www.decisionpoint.com

OEX options traders:  This smart money indicator gave a one day put/call ratio that has preceded recent pullbacks.  This is a very short term indicator but can be very accurate.


                                Charts provided courtesy of www.decisionpoint.com

Resistance:  The recent rally has the S&P near the next level of resistance.  We could see a short-term move to 1260 to 1280.


                                Charts provided courtesy of www.decisionpoint.com

Option Expiration:  This week is options expiration week and the market tends to be stronger than average this week.  The week after option expirations week tends to be weaker than average historically.  The Monday of the week following options expirations week has been particularly week this year. 

And last, and certainly least, I have had Tuesday August 22nd circled on my calendar.  We talked a little about this on the message board the other day.  Here it is...

WSJ: Scholar Warns Iran's Ahmadinejad May Have 'Cataclysmic Events' In Mind For August 22
Tue Aug 08 2006 10:22:35 ET

In a WALL STREET JOURNAL op-ed Tuesday, Princeton's Bernard Lewis writes: "There is a radical difference between the Islamic Republic of Iran and other governments with nuclear weapons. This difference is expressed in what can only be described as the apocalyptic worldview of Iran's present rulers."

President Mahmoud Ahmadinejad "and his followers clearly believe that this time is now, and that the terminal struggle has already begun and is indeed well advanced. It may even have a date, indicated by several references by the Iranian president to giving his final answer to the US about nuclear development by Aug. 22," which this year corresponds "to the 27th day of the month of Rajab of the year 1427. This, by tradition, is the night when many Muslims commemorate the night flight of the prophet Muhammad on the winged horse Buraq, first to 'the farthest mosque,' usually identified with Jerusalem, and then to heaven and back (c.f., Koran XVII.1).

"This might well be deemed an appropriate date for the apocalyptic ending of Israel and if necessary of the world. It is far from certain that Mr. Ahmadinejad plans any such cataclysmic events precisely for Aug. 22. But it would be wise to bear the possibility in mind."

My not so professional opinion on this is that it is probably hype.  But why take the chance considering the other data? 

So I plan to move to a 50% stock allocation, this morning.  I will initiate an interfund transfer to 50% G, 50% C.  This will be a short-term move - probably just a few days to a week.  This is as defensive as I want to get with the longer-term indicators still very bullish.  If we do get a 1% or 2% pullback I will use that to get back to 100% stocks.

That's all for today.  Currently 30% G and 70% C fund but going to 50% G, 50% C this morning.  Thanks for reading. 
 

---

RevShark's TSP Timing Newsletter is now available.  You can go to www.tsptalk.com/members1 to sign up.  TSP Timing is a weekly newsletter giving subscribers a target allocation determined by professional hedge fund manager James 'RevShark' DePorre.   Subscribers will navigate the financial seas along side the Rev while he manages millions of dollars for private investors.  Each week he will highlight TSP funds and a target allocation he believes will provide the best investment potential. The newsletters will go over charts of each fund with a technical breakdown of each by RevShark.  The subscription now includes a midweek updates as needed.

The subscription price will be $19.95/month which will include 4 to 5 weekly newsletters each month, plus midweek updates as needed.  The newsletter will be in PDF format so you will need an Adobe Reader (Download it free here.)

Still have questions about the TSP Timing Newsletter?  Click here.