Sometimes I wish I were an economist. Then I could develop my own theories about the economic future and compare them with others -- naturally mine would be much more insightful. I could come up with projections indicating stagflation, recession or a continuation of the good times forecast by the administration.
But then I realize that even though I might have a forecast that turns out to be correct, I am not necessarily going to make money in the stock market. It is always about comparing reality with the market's expectations.
At the current time, using my indicators as a guide, I perceive that the market is relying on hope. Sure, things are bad. But they ought to improve in the second half or, at a minimum, next year. However, a severe credit crunch coupled with skyrocketing commodity prices may take longer to correct than many people think. Earnings and price-to-earnings multiples are both at risk in the current environment.
Reading the Meters
To be sure, my indicators are not all negative. The equity put/call ratio remains very high and is still rated as extremely bullish. The confidence level of smart investors compared with that of dumb investors is still extremely bullish, even though the difference is beginning to narrow now.
The volume of short-selling by odd-lot investors compared with purchases made by the same group is still reasonably high and is rated neutral.
As has been the case since last fall, the problems show up when looking at indicators that show, in a broad-based way, what smaller investors and speculators are doing with their money. The biggest problem, as I have discussed previously, is the continuing level of speculative activity as measured by the ratio of
Nasdaq volume to
NYSE volume. Again last week, the ratio was high, and I continue to rate this indicator as extremely bearish.
Flows of money into the Rydex family of funds are also a problem. Although currently rated as neutral, the heavily weighted flow of money into the bullish funds (a bearish phenomenon) that occurred last fall and winter was never totally reversed, and now more money is beginning to come back to these bullish funds. I don't attempt to forecast my own indicators, but continuing market strength will certainly turn this indicator bearish.
Finally, let's look at some other odd-lot activity:
This is a five-year chart of a 10-week moving average of total odd-lot sales (including short sales) divided by odd-lot purchases. The indicator is shown in red, and the
S&P 500 is shown in black. The green trend lines relate to the average of the indicator and its standard deviation. When odd-lot investors are optimistic, as they are becoming now, they tend to do less selling and shorting and tend to do more buying. This is a signal to become more defensive. The indicator has now reversed the minor bullish position it attained in mid-March and is now rated as bearish.
All things considered, and recognizing that momentum could well carry the market higher in the short term, I am increasing my target cash position from 22% to 27%. The actual cash position in my IRA at the end of last week was 22.3%.
I continue to find it very difficult to find attractive new investments to buy. I sold my remaining position in
Rofin Sinar Technologies
(RSTI)
last week because I had held the stock for seven months, and it no longer appeared on my screening system as a buy.
With an up market, most of the news was good last week.
Cal-Maine Foods
(CALM)
rebounded a bit from its recent weakness and was up 14.4%. My screening system continues to identify this stock as a buy.
Stepan Company
(SCL)
reported first quarter sales up 22% and earnings per share up 52%, pushing the stock up nicely last Tuesday, but by Friday, profit-taking had set in, and the stock ended the week lower. I continue to believe that this stock is attractive.
Complete Production Services
(CPX)
also reported its first-quarter results. Revenue was up 12%, but EBITDA was only up 3% compared with last year. The good news, though, was that these results were better than expected, and the stock ended the week up 7%. This stock still sells at a 35% discount to the median company in the oil and gas services and equipment industry and seems attractive on that basis.
Finally,
Sybase
(SY)
reported excellent results for their first quarter, with revenue increasing 13% and EPS up 46%. The stock had a nice bounce after the report but was only up about $1 for the week. This is an application software company that sells at about a 30% discount to the industry median and still looks very attractive.
The table that follows shows all of 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 |
$33.10 |
148.87% |
| CPX |
Complete Production Services |
3/27/2008 |
$22.37 |
$27.85 |
24.50% |
| EXAC |
Exactech |
11/5/2007 |
$21.00 |
$25.17 |
19.86% |
| GIB |
CGI Group |
3/9/2007 |
$8.52 |
$11.53 |
35.33% |
| HP |
Helmerich & Payne |
12/27/2007 |
$39.88 |
$55.84 |
40.02% |
| ISYS |
Integral Systems |
3/5/2008 |
$25.90 |
$31.45 |
21.43% |
| LSR |
Life Sciences Research |
3/11/2008 |
$24.22 |
$27.51 |
13.58% |
| SCL |
Stepan Co. |
2/27/2008 |
$34.94 |
$38.60 |
10.48% |
| SCX |
L.S. Starrett |
12/10/2007 |
$18.88 |
$19.51 |
3.34% |
| SGY |
Stone Energy |
11/1/2007 |
$43.74 |
$67.11 |
53.43% |
| SPY |
S&P Dep. Receipts |
1/14/2008+ |
$132.20 |
$139.60 |
5.60% |
| SY |
Sybase |
11/13/2007 |
$25.79 |
$28.87 |
11.94% |
| USPH |
US Physical Therapy |
1/17/2008 |
$13.98 |
$15.57 |
11.37% |
| One Month Screen |
|
No Current Holdings |
|
|
|
|
| Performance Results as of 4/25/2008 |
|
|
IRA |
S&P 500 |
|
|
Full-year 2007 |
|
33.0% |
5.5% |
|
|
2008 Year to date |
|
2.1% |
-4.3% |
|
Total return for IRA
S&P 500 does not include income for current quarter
|
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Please note that due to factors including low market capitalization and/or insufficient public float, we consider SCL, EXAC, SCX and USPH 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.
At the time of publication, Moore was long CALM, SCL, CPX, EXAC GIB, ISIS, LSR, SCX, SGY, SPY, SY and USPH, although positions may change at any time.
Richard Moore, CFA, has 40 years of experience in various facets of the investment business. He has been employed by banks, mutual funds and investment advisory organizations during his career and has also owned retail and service businesses. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Moore appreciates your feedback;
click here to send him an email.
Read our conflicts and disclosure policy.
