RealMoney Silver - IRA Investing: Getting Positioned

IRA Investing: Getting Positioned
By Richard Moore
RealMoney.com Contributor
2/13/2008 9:42 AM EST

It was a pretty ugly market last week, as we gave up almost all of the progress attained in the rally of the previous week. More bad economic news surfaced that indicated we are entering a period of slower growth or recession, depending on which pundit is making the projection. More bad economic news is probably coming, but the market has certainly already partially discounted the weakness.

I believe something else is going on as well. Last week was a big political week, and the likely outcome of the 2008 election is becoming clearer. I see the enthusiasm on the Democratic side far surpassing that for the Republicans, and I believe the market is in the process of discounting a Democratic victory. Can we elect a president who believes the free market needs substantial government help to work effectively? Can we elect someone who wants to remove the cap on taxable wages for Social Security taxes? Can we elect a president who wants to raise taxes on capital gains and dividends? Yes - we - can!

As this process of discounting unfavorable events goes on, my indicators are slowly improving, but none of them have changed enough to call for a reduction in cash position at this point.

The most disappointing indicators continue to show that smaller investors and some speculators still view the decline as simply a correction that amounts to a good buying opportunity. Odd-lot sales compared to odd-lot purchases are stuck at a low level in negative territory. Money flows into the Rydex family of funds are improving as these investors are shifting to a more cautious stance, but this indicator is still negative. Interestingly, volume on the Nasdaq increased last week relative to volume on the NYSE, and that indicator also remains negative. After the beating many of the technology stocks have taken, there is apparently still an appetite for increased risk.

On the positive side, odd-lot short sales compared to odd-lot purchases remains at record levels; this indicator is still rated as very bullish. The confidence level of smart investors compared to that of dumb investors increased nicely last week and is still bullish. Now let's look at the put/call ratio:

CBOE Put/Call Ratio vs. S&P 500

Click here for larger image.

This is a five-year chart of a four-week moving average of the equity only put/call ratio on the CBOE in red. The S&P 500 is shown in black and the green trend lines relate to the weighted moving average of the indicator and its standard deviations.

We have seen a nice increase in the put/call ratio in the last few weeks, indicating that speculators are buying puts aggressively in order to capitalize on the decline. This is a good indication that this decline will probably come to an end soon -- at least on a short-term basis.

Taking all these factors into consideration, my outlook remains neutral and my target cash position remains unchanged at 40%. The actual cash position in my IRA at the end of last week was 38.9%.

Updates

The only transaction in my IRA last week was the sale of part of my position in SPDR Trust (SPY) in order to increase my cash position to a level close to my 40% target.

I am continuing to look for attractive purchase candidates because I would rather own good individual stocks rather than an exchange-traded fund, but I am finding it very difficult to come up with new ideas. This is not necessarily all bad, because it is too early to tell what industries and individual stocks will be market leaders in the next market upturn.

Sometimes patience is required before making commitments, and this is one of those times.

I actually didn't have too bad a week last week. My IRA was only down 0.7% while the S&P 500 was down 4.6%. The cash helped, of course, but most of my holdings were pretty stable.

Open Text (OTEX) reported good earnings results during the week and was only down 24 cents. This stock remains highlighted on my screening system and sells at a 20% discount to the median company in the business software industry. I consider it a buy.

My biggest winner last week was Exactech (EXAC) . The stock was up 6.1% and is now up 16.4% since purchase in an absolutely horrible market. At these prices, I consider the stock fairly valued and will probably sell one half of my position this week.

The table that follows shows all the current holdings in my IRA as of the end of last week:

Symbol	Name	Purchase Date	Cost	Price	Gain
Regular Holdings
CALM	Cal-Maine Foods	4/16/2007	$13.30	$29.73	123.53%
CTV	CommScope	8/15/2007	$50.79	$45.47	-10.47%
EXAC	Exactech	11/5/2007	$21.00	$24.45	16.43%
FTO	Frontier Oil	9/7/2007	$40.60	$37.44	-7.78%
GIB	CGI Group	3/9/2007	$8.52	$10.27	20.54%
HP	Helmerich & Payne	12/27/2007	$39.88	$41.32	3.61%
ICFI	ICF International	9/14/2007	$25.28	$25.69	1.62%
KCI	Kinetic Concepts	2/6/2007	$49.75	$50.30	1.11%
OTEX	Open Text	9/14/2007	$25.68	$31.35	22.08%
RSTI	Rofin-Sinar Technologies	9/21/2007	$35.06	$38.66	10.27%
SCX	LS Starrett	12/10/2007	$18.88	$15.47	-18.06%
SGY	Stone Energy	11/1/2007	$43.74	$43.71	-0.07%
SPY	SPDR Trust	1/14/2008+	$136.24	$133.07	-2.33%
SY	Sybase	11/13/2007	$25.79	$27.38	6.17%
URS	URS Corp.	8/28/2007	$50.03	$45.39	-9.27%
USPH	U.S. Physical Therapy	1/17/2008	$13.98	$13.44	-3.86%
WDC	Western Digital	8/31/2007	$23.33	$28.20	20.87%
One-Month Screen
	No Current Holdings
Performance Results as of 2/8/2008				IRA	S&P 500
	Full-Year 2007			33.0%	5.5%
	First Quarter to Date			-4.7%	-9.3%
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 Exactech, ICF International, LS Starrett, U.S. Physical Therapy, GP Strategies to be a small-cap stock. 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.