IRA Investing: Looking For a Trend

The market staged a decent recovery last week, although the leadership remained in question as the energy sector took a breather. I think there are three basic problems confronting the market, and it is hard to see any positive resolution until at least a couple of them are resolved.

1. We have continuing economic uncertainty about whether we are entering recession and, if so, how long and how severe it will be.
2. The market leadership appears to be in a bubble phase. It is very difficult to climb onboard the energy or commodity bandwagon at this late date, because we all know what can happen if the bubble bursts. No other groups have moved to the forefront to take over a leadership position.
3. The political situation remains highly uncertain. I sense an inverse correlation between Sen. Obama's popularity and the S&P 500 index. But many more shifts in the political landscape are likely between now and November -- it is too early to predict a winner. It seems clear, though, that supporters of free trade and free markets are going to be waging an uphill battle.

My indicators remained unchanged last week. The equity-only put/call ratio remained neutral, as did the ratio of odd-lot short sales to odd-lot purchases and the difference in confidence levels between smart investors and dumb investors.

Continuing in negative territory are the money flows into the Rydex family of mutual funds that indicate a bullish bias on the part of these investors. Similarly, odd-lot buyers seem overconfident and are buying at bearish rates compared to odd-lot sellers.

Finally, let's look at my most bearish indicator, the ratio of Nasdaq volume to NYSE volume:

Nasdaq Volume/NYSE Volume vs. S&P 500

Click here for larger image.

This chart shows (in red) a 10-week moving average of the ratio of Nasdaq volume to NYSE volume. The S&P 500 is shown in black, and the green trend lines relate to the average of the indicator and its standard deviation.

When this ratio increases, as it did last fall, it indicates an increased appetite for speculation. Even though we saw a substantial reduction in the ratio during some weeks in March, the 10-week average never really moved down much, and now the indicator has reached new highs as this rally off the March lows has progressed for 10 weeks or so. This is a very negative trend and adds substantial risk to the market environment.

I am aware that this ratio may be somewhat skewed by the fact that more and more NYSE volume is being done off the floor of the exchange. Nevertheless, new highs in this ratio, along with other signs of complacency make me very nervous.

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At the time of publication, Moore was long Cal-Maine Foods, Complete Production Services, Exactech, CGI Group, Helmerich & Payne, Integral Systems, Life Sciences Research, Stepan, LS Starrett, Stone Energy, Sauer-Danfoss, Synnex, SPDR Trust, Sybase and U.S. Physical Therapy, 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.