Seeing reasons for a rally but I think patience is the play

On Friday I showed you the latest AAII Investor Sentiment Survey (see Friday's comments on the second half of the page) where the ratio of bulls to bears went from 3 to 1 just a few weeks ago, to more bears than bulls now.  That's what happens when the market drops but that was a pretty quick change.  Does that mean it's time to buy?  Maybe.

DecisionPoint.com put up a chart this weekend about the Rydex Cash Flow Ratio.  It basically says that Rydex mutual funds are seeing more money being put into bearish funds (bets the market will go down) and money market type investments, than into bullish mutual funds.  It is happening at a rate that is fast approaching a level that tends to show the selling could subside and a new rally may begin any time.  This is a complete reversal of what we saw at the end of July.


                         Chart provided courtesy of www.decisionpoint.com

This does not mean the market will not go down further but it is a step in the right direction for the bulls.

Some put / call ratios are also coming off their extreme bullish readings suggesting that investors are getting more nervous (a positive sign for the market).  Not to the extent of the others indicators, but something worth watching.  The same is true of a few of my other favorite indicators.

The 10-day moving average of the ARMS index and the 21-day of the McClellan Oscillator are in no mans land.  They are in an area that could go either way like the put / call ratios.

All this adds up to some potential volatility in the market.  We could get a little rally to bring those indicators right back into a sell zone.  We could see more selling to bring those indicators deeper into a buy zone.  Since the intermediate term indicators (3 to 6 months) are still suggesting a longer term pullback, I am leaning that way.  But if one were more nimble they may might want to take advantage of the short term extreme readings of some of the indicators.  That means possibly jump in and out of funds based on these readings.

The worst thing that could happen to me return-wise right now, would be to jump into stocks after being out for two months and having stocks drop.  All of my patience would be for naught. 

Oil was up over $2 a barrel on Friday and that will continue to be a thorn in the side for the stock market.  The dollar's recent rebound is also still intact posting a higher high, and higher low Friday.

The summer doldrums appear to be upon us as the earning reports are behind us and Wall Street vacation season is at its peak.  What will provide a stimuli for the market?  I'm not sure the short term sentiment indicators are enough to give us a big rally, but its a start.  For now I'll stay on the sidelines waiting.  The sidelines this time for me is the bond fund which seems to be at the bottom of a trading range.

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