Do we keep rallying or will the chop continue?

Friday's comments page was entitled, "Ho Hum" and Friday's action turned out to be anything but ho hum.  The market is seeing sentiment shift very quickly on relatively minor moves.  The indicators are leaning toward overbought as we head into options expiration week.  A week that tends to be more positive than a random week. 

With that said and with Friday's big rally, we could see some momentum carry over to this week as the herd reads their Sunday paper and sees that the market is moving up again. 

The week following options expiration week (next week) is typically weaker than a random week.  In fact the week following options expiration week in September has done very poorly in recent years.  Excluding 2001, since 1999 every one of the weeks following September option expiration has been negative, by an average of -3.0%.  That also happens to be the week the Fed will make a decision interest rates (9/20).


                           Chart provided courtesy of www.sentimentrader.com

Now that really does not tell us much.  I tend to put all the information together and draw a conclusion and act based on all of the information.  Just because it is a trend does not mean it will happen again.  It's sort of like flipping a coin.  If it comes up heads 4 times in a row, what are the odds it comes up heads again?  50%.  Just like all the previous flips.  The difference with market trends is that it is not random like a coin flip.  Outside influences affect the outcome of the market so trends should be considered in your decision making.

I had mentioned the OEX options traders on Friday.  I continue to look at this as a sign of trouble ahead.  The track record of this indicator is pretty solid.  Here is another look at this information. 
   
      
                   
To remind you, OEX option traders are not contrarian indicators.  When these option traders get extremely bullish or bearish, you should take note.  The fact that they are now betting on a market decline at a nearly 2 to 1 ratio should be of some concern.

I know I am starting to sound like a perma-bear to some of you but that is not the case.  I am looking forward to getting back into stocks so I can start making some money.  I just feel we still have some short term weeding out to do before we get there.  I was hoping we would have been past this by now but I now believe it will take slightly longer.  My guess is we will be there before the end of the year or at worst, early 2006. 

Now remember, I don't know what the market is going to do (I probably didn't have to remind you of that).  I just weigh the information and make a decision.  If you choose to follow me that is your decision.  I will be wrong many times, and I will be correct at times.  We are looking to beat the market over the long term.  Not on a daily, weekly, or even monthly basis.  To do that we have to put ourselves in a position to that puts the odds in our favor.  If I had a two headed coin and could bet on heads I would win every time.  But our coin has two sides and we won't be correct all the time.  So do we rally or will the chop continue? ... Heads or tails?

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