RealMoney Silver - IRA Investing: Odd-Lot Indicator Turns Bearish

IRA Investing: Odd-Lot Indicator Turns Bearish
By Richard Moore
RealMoney.com Contributor
9/26/2007 6:14 AM EDT

The big news last week was, of course, the half-point reduction in interest rates by the Federal Reserve on Tuesday. And while I was celebrating like all other long and fully invested market participants, I couldn't help but wonder what the real long-term and philosophical implications were for the U.S. economy.

It seems to me that the government has become the nanny whose main responsibility is to save the country's citizens from all manner of self-inflicted poor decisions. Then, after watching the Democratic debate on Wednesday, I wondered what areas of my life would still be mine to control over the next several years. On top of the government helping to negotiate my house payment for me, the government mandates my retirement funding, and it sure doesn't seem like it will be long before my health care decisions will be made for me as well.

These are important factors that are changing in our economic system, and I'm concerned that the capitalistic system that has served us so well may be morphing into something else. I'm not too concerned over the next few months, but as we approach Election Day 2008, I may get more uncomfortable.

In the meantime, as always, I'm most interested in the position of my indicators. The long-term indicators that I follow remain uniformly bullish. Shorting by small investors and speculators remains near record levels. The breadth of the market shows no important divergences at this point, and stock market valuation still seems very attractive.

My intermediate indicators, though, have weakened as the market jumped up last week. The level of put-buying compared with call-buying of individual issues on the CBOE remains bullish. However, the level of confidence exhibited by smart investors compared with dumb investors that I obtain from sentimentrader.com has declined from very bullish to bullish.

Finally, the activity of odd-lot sellers compared with odd-lot buyers has now declined to very bearish territory. Let's look at a chart of that indicator now:

Odd-Lot Short Sales and Purchases Vs. the S&P 500

Click here for larger image.

This is a five-year chart of the 10-week moving average of odd-lot sales divided by odd-lot purchases (in red). The S&P 500 is shown in black. The green trend lines are computed using a weighted moving average of this indicator and its standard deviations.

When odd-lot investors are very concerned with the market outlook, as they were in late 2002 and early 2003, they become net sellers of stock. This would have been a good buying opportunity, since we want to do the opposite of what these smaller investors are doing.

Now, though, the situation has totally reversed, and odd-lot investors are buying more than they are selling at the highest rate in the last several years. The latest correction was not at all bothersome to these smaller investors -- they just considered the weakness to be a buying opportunity.

This is a red flag, but by itself it is not an indication that we should raise large amounts of cash. If other indicators weaken also, then more aggressive selling might be warranted.

This set of indicators means that my target cash position has increased from 6% to 10%. The actual cash position in my IRA at the end of last week was 7.9%, so I will probably be increasing my cash position a little next week.

I made a couple of transactions in my IRA last week. I sold my position in W-H Energy Services (WHQ) because the price of the stock had increased to the point that I felt the stock was fairly valued. This was essentially a reduction in my total holdings in this company, because I continue to have a position in this company in another account.

I took a new position in Rofin-Sinar Technologies (RSTI) . This is a company specializing in laser technology products used in the electronics industry as well as the machine tool and automotive sectors.

Sales have grown at an average annual rate of 13.8% over the last five years, just a bit slower than the 15.1% growth rate of the scientific and technical instruments industry. Net income has grown much faster than the industry (47.1% vs 14.1%). The company has a strong financial position with a debt/equity ratio of only 0.1.

Valuation is substantially below industry averages, with a current P/E ratio of 21.2 compared to the industry at 46.5. Enterprise value/EBITDA is currently 10.4 times, a 30% discount to the median company in the industry.

The table that follows shows all the current holdings in my IRA as of the end of last week, along with performance figures.

Symbol	Name	Purchase Date	Cost	Price	Gain
Regular Holdings
AXYS	Axsys Technologies	8/27/2007	$24.14	$29.00	20.13%
CALM	Cal-Maine Foods	4/16/2007	$13.30	$22.97	72.71%
CF	CF Industries	5/3/2007	$40.57	$73.50	81.17%
CTV	CommScope	8/15/2007	$50.79	$52.62	3.60%
FTO	Frontier Oil	9/7/2007	$40.60	$45.34	11.67%
GIB	CGI Group	3/9/2007	$8.52	$11.06	29.81%
KCI	Kinetic Concepts	2/6/2007	$49.75	$57.04	14.65%
LAYN	Layne Christensen	5/22/2007	$41.26	$53.96	30.78%
OTEX	Open Text	9/14/2007	$25.68	$25.66	-0.08%
PRXL	PAREXEL Int'l	6/12/2007	$39.80	$41.17	3.44%
RDEN	Elizaberth Arden	7/18/2007	$23.44	$26.43	12.76%
RSTI	Rofin-Sinar Technologies	9/21/2007	$70.11	$70.09	-0.03%
SPY	S & P Dep Receipts	7/18/2007+	$150.50	$151.97	0.98%
URS	URS Corp.	8/28/2007	$50.03	$58.00	15.93%
WDC	Western Digital	8/31/2007	$23.33	$24.32	4.24%
WRNC	Warnaco Group	3/14/2007	$26.99	$39.35	45.79%
One Month Screen
DCO	Ducommun Inc.	9/14/2007	$29.30	$31.06	6.01%
ICFI	ICF International	9/14/2007	$25.28	$27.21	7.63%
NSIT	Insight Enterprises	8/16/2007	$23.56	$26.02	10.44%
MCRI	Monarch Casino & Resort	9/14/2007	$28.85	$29.14	1.01%
PH	Parker Hannifin	9/14/2007	$106.50	$113.96	7.00%
Performance Results As Of 9/21/2007				IRA	S&P 500
	Quarter To Date			6.3%	1.5%
	Year To Date			28.4%	8.6%
Total return for IRA S&P 500 does not include income for latest quarter

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Axsys, Ducommun and ICF International to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.