RealMoney Silver - IRA Investing: Intermediate Indicators Suggest a Rally

IRA Investing: Intermediate Indicators Suggest a Rally
By Richard Moore
RealMoney.com Contributor
1/24/2008 8:29 AM EST

Last week's market action certainly opened up the possibility that this decline will turn into a bear market, as all the market pundits who were so bullish just a couple of months ago now can't wait to go to the dark side.

There are many questions to be answered: Will we slide into recession? Will government actions help? Will the bond insurers go belly up? Of course, when these questions are answered, there will inevitably be more to take their place. I'm still relying on my indicators to point me in the right investment direction.

Those long-term indicators are not giving me much help right now, though, because they remain neutral:

The volume of short-selling by odd-lot investors remains near record levels, and I consider this indicator to be bullish.
The action of the average stock compared with the major stock market averages has been poor, but the divergences do not signal anything worse than a correction at this point -- I rate this indicator as neutral.
The volume of stock traded on the Nasdaq compared with the volume on the NYSE is improving but is still rated as bearish.

What looks most likely at this point is that we will soon see a nice rally in stock prices. It will be important to watch the character of that rally very closely to answer the "bear market or correction" question.

I think we will soon experience a nice rally because my intermediate indicators improved last week. The only weak spot was the volume of odd-lot sales compared with odd-lot purchases. This indicator has stubbornly refused to move into bullish territory in spite of the big decline in stock prices; odd-lot investors have continued to buy at a healthy pace. The indicator has improved from bearish levels but still remains neutral.

Put volume compared with call volume on the CBOE skyrocketed last week to 0.92, a level only exceeded three times in recent history -- once right after the terrorist attacks of Sept. 11, 2001, and then twice near the ultimate bear-market bottom in late 2002 and early 2003. This indicator remains bullish.

Smart/Dumb Differential vs. the S&P 500

Click here for larger image.

Now, let's look at a comparison between smart investor confidence and dumb investor confidence as reported at SentimenTrader.com:

This chart shows a four-week moving average of the difference in smart investor confidence and dumb investor confidence (in red). The S&P 500 is shown in black, and this chart covers a five-year time span.

Recently we have seen an increase in the confidence levels of historically smart investors coupled with a decrease in confidence by dumb investors. The indicator has now climbed over the bullish threshold at +15.

Overall, this confluence of indicators leads me to reduce my target cash position to 10% from 15%. At the end of last week, my IRA was holding a cash position of 13.1%, so I will be doing some buying this week.

Sales

Last week, I eliminated a couple of holdings from my IRA. I sold the remainder of my position in EnerSys (ENS) because the stock seems overvalued by at least 10% at current price levels. I also sold my position in Parexel (PRXL) because I had held that stock for seven months and it no longer appears on my screening system as a buy. In order to hold my cash position near the previous 15% target, I bought some SPDR Trust (SPY) .

Purchases

I took a new position last week in U.S. Physical Therapy (USPH) . This company takes partnership and profit-sharing stakes in businesses that provide physical and occupational therapy to clients. Improving demographics should help this company grow, as an older population increasingly requires help with pre- and postoperative care for orthopedic surgery.

Past growth has been good, but not as good as industry averages. However, the company now seems more interested in growing the business and has started to make some acquisitions. The company has a solid financial position with a debt-to-equity ratio of 0.21 and a current ratio of 3.3. Return on equity and assets are substantially above industry norms. Valuation, though, is well below industry averages when looking at price over sales, price over book or price over cash flow. The company's enterprise value/EBITDA ratio is about a 25% discount to the median company in the specialized medical services industry.

The following table shows all of the current holdings in my IRA. I'm not too disappointed in my performance so far this year, because I have been able to stay pretty close to the S&P 500. This is a tough and volatile market, but I'm going to maintain an unemotional approach; I expect a better environment over the next couple of months.

Symbol	Name	Purchase Date	Cost	Price	Gain
Regular Holdings
AXYS	Axsys Technologies	8/27/2007	$24.14	$37.06	53.52%
CALM	Cal-Maine Foods	4/16/2007	$13.30	$23.97	80.23%
CTV	CommScope	8/15/2007	$50.79	$41.03	-19.22%
EXAC	Exactech	11/5/2007	$21.00	$22.39	6.62%
FTO	Frontier Oil	9/7/2007	$40.60	$33.12	-18.42%
GIB	CGI Group	3/9/2007	$8.52	$9.41	10.45%
HP	Helmerich & Payne	12/27/2007	$39.88	$35.47	-11.06%
ICFI	ICF International	9/14/2007	$25.28	$23.44	-7.28%
KCI	Kinetic Concepts	2/6/2007	$49.75	$50.02	0.54%
OTEX	Open Text	9/14/2007	$25.68	$29.00	12.93%
RDEN	Elizabeth Arden	7/18/2007	$23.44	$16.94	-27.73%
RSTI	Rofin-Sinar Technologies	9/21/2007	$35.06	$35.72	1.88%
SCX	L.S. Starrett	12/10/2007	$18.88	$17.30	-8.37%
SGY	Stone Energy	11/1/2007	$43.74	$41.26	-5.67%
SPY	SPDR Trust	1/14/2008	$140.79	$132.06	-6.20%
SY	Sybase	11/13/2007	$25.79	$25.50	-1.12%
URS	URS Corp.	8/28/2007	$50.03	$40.96	-18.13%
USPH	U.S. Physical Therapy	1/17/2008	$13.98	$13.87	-0.79%
WDC	Western Digital	8/31/2007	$23.33	$23.61	1.20%
One Month Screen
CMCO	Columbus McKinnon	12/26/2007	$33.38	$23.20	-30.50%
KEX	Kirby Shipping	11/26/2007	$43.49	$40.94	-5.86%
GPX	GP Strategies Corp	12/26/2007	$10.95	$10.22	-6.67%
MANT	ManTech International	12/26/2007	$44.70	$38.72	-13.38%
PRGS	Progress Software	12/26/2007	$33.89	$29.63	-12.57%
Performance Results as of 1/18/2008				IRA	S&P 500
	Full-Year 2007			33.0%	5.5%
	First Quarter to Date			-10.0%	-9.8%
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 Technology, Exactech, ICF International, Elizabeth Arden, L.S. Starrett, U.S. Physical Therapy, Columbus McKinnon and GP Strategies 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.