Just when things look their worst...

It's never easy to jump into stocks when things look their worst but as we talked about yesterday, the planets were aligning themselves just right for a little bounce.  We got lucky this time.  The big question on everyone's mind now of course is whether the rally is for real or just temporary. 

We went into August knowing that it was not a great month historically.  It didn't disappoint as the indices made a steady slow decline throughout the month.  Now comes September; the worst month of the year by far in both percentage of times positive, and in average return. 

                          Charts provided courtesy of www.sentimentrader.com

The indicators I mentioned yesterday were really a screaming buy, but mainly on the short term.  The intermediate term picture improved nicely in August but there are still some weak spots.  I don't know if this is a positive for the short term or not, but the S&P was only down 3% off its high during this pullback.  That is not much of a pullback and I've expressed my surprise at how oversold things became with a small pullback.  So are we due for more damage or was that it? 

You can see yesterday's rally was very impressive but it closed at the old support line which tends to act as resistance once penetrated.  Also, the downtrend has really not been broken yet.


                          Charts provided courtesy of www.decisionpoint.com

Of the three days prior to the Labor Day weekend, today is least positive but it is September 1st and that tends to be postive.  A small drop here wouldn't be terrible but I'll be keeping an eye on yesterday's highs and lows to see if the downtrend continues or if there are buyers at this resistance point.

One of the indicators I mentioned yesterday was the ARMS Index 10-day moving average.  I like to see this indicator move below 1.30 as a buy signal (the indicator is inversed with the larger numbers on the bottom).


                          Charts provided courtesy of www.decisionpoint.com

In July it moved down to 1.22, not quite there, and I missed a good rally.  In late July it came down to 1.17, not good enough.  Just recently it hit 1.28 and I used that as an indication, along with other indicators and the seasonality information, to jump into stocks for a few days.  You can see that this indicator can move much lower but the majority of the damage to the indices is usually already done by the time it hits 1.30.

The thing you want to watch for is a drop like we see at point A.  Usually a solid bottom will come back and test the lows before heading higher again.

The news is grim and we know that sentiment is lowest near a bottom.  Even though many of our indicators suggest pessimism is high, I just don't get the feeling we saw the fear that a bottom usually delivers to investors.  Perhaps I feel that way because I was lucky enough to be on the sidelines and able to side step the pain.  The new AAII Investor Sentiment Survey results are in and those polled being bullish were 32%, and those bearish 38%.  That is a good sign but I still don't rule out one more whooosh down some time after the holiday.

That's all for today.  Currently 70% S and 30% F fund.  Thanks for reading.