Bonds, the dollar, sentiment, and seasonality

Some days I find myself struggling to come up with something new to write about and other days, like today, I have so much to say that I may challenge your bandwidth limits.  I'll try to keep it succinct. 

I made my first interfund transfer in over two months yesterday before the deadline going to 100% F fund.  As I mentioned in yesterday's comments bonds were looking attractive for a short term play based purely on technical analysis.  Turns out it would have been nice to make that transfer a day earlier.  Bonds were up .03 on the day.  We don't see many .03 days in bonds.  That's about 3 weeks worth of G fund gains.  Darn that one day delay.  I just hope it continues rather than seeing a profit taking down day just as the allocation takes effect Friday. 

Last Friday I mentioned that investors were starting to bet heavily against the U.S. Dollar.  That is, they were putting their money into Rydex mutual funds that did well when the dollar goes down, and taking money out of funds that do poorly when the dollar goes down.  Being more of a contrarian investor I suggested that it may be time to pull out of the I fund (The I fund doesn't do well when the dollar goes up).  The fund had a very nice run while the dollar was falling recently and taking your profits (if you were smart enough to have been there) may have been prudent. 


                         Chart provided courtesy of www.decisionpoint.com

You can see we've had a nice bounce in the dollar since.  That Rydex fund indicator still shows heavy betting against the dollar.  Will they continue to be wrong?

A very interesting change occurred in sentiment.  The AAII Investor Sentiment Survey came out yesterday and the bearish percentage jumped up to 40%.  Remember it was just 18% at the end of July?  Some of our new readers may get confused by these numbers.  Just like the the dollar bouncing when everyone thinks the dollar is going to fall, stocks tend to peak when everyone is bullish (believe the market is going to go up).  I'm trying to be succinct so I'll explain this better on a day I have less to say.

Anyway, take a look at this chart.


                         Chart provided courtesy of www.decisionpoint.com

The ratio dropped to below 1.00 (More bears than bulls.  See bottom indicator).  When that happens it means more people believe the market will fall than believe it will go up.  Usually that is a sign that the market will rally (contrarian view) but it takes time for all of those bulls we had just a couple of weeks ago, to really turn bearish and actually sell their stocks.  If you look back to April and May you can see the market lows did come when the bearish percentage was at or above 40%.  But the  ratios below 1.00 could go on for a few weeks before a real low was made and a rally ensued.

The market rarely goes straight down so we will get small rallies here and there to test you.  How much downside can you stand before you want to jump back in?  Well in a real pullback, you should get in when you no longer want to.  That is, when you that the market will never rally again.  That's when a bottom is in.  Fun game, huh?

OK, one last thing.  Seasonality.  August is not a great month historically and September is even worse.  But I'm seeing a window of opportunity from Wednesday August 31 to Friday September 2 as a possible short term play in stocks purely on seasonality data.  I rarely do that but it may be worth a shot depending on what is happening at the time.  Again I'm trying to not to take up too much of your time today so I'll discuss this more as it approaches.  But take a look at the last trading day in August on the seasonality chart at the bottom of this page.

That's all for today.  Currently 100% F fund.  Thanks for reading.  Have a nice weekend.