IRA Investing: Looking for the Next Leaders

The market stabilized last week as many financials bounced impressively from price levels they had fallen to in a fearful environment. The market leaders, however, were mainly lower as energy prices corrected. This market action was encouraging, and it looks distinctly possible that we have seen the beginning of the end of this bear market.

The big question, though, remains unanswered: What groups will likely be leaders in the next bull market?

It would be very unusual for financials to lead the market higher, and commodity-type companies would only lead if inflation were to continue to be a big problem.

Paradoxically, I believe the best we can hope for is a worldwide economic slowdown that brings commodity prices down and sets the stage for a recovery in 2009. But since I am not an economist, I continue to rely on my sentiment indicators to give me an indication of market direction. Those indicators continue to improve but not enough to make aggressive purchases.

Sentiment Slowly Shifting

Most of my indicators remain neutral. I am focusing on money flows into the Rydex family of funds. These flows are shifting to the bearish (short) side but still not enough to turn this indicator bullish. It remains classified as neutral.

Also neutral are all three indicators that focus on the behavior of odd-lot investors. Shorting and selling by this group of investors have picked up while purchasing has declined. More of this action is needed to turn these indicators bullish, and they remain neutral.

One indicator that has turned modestly bullish is the difference in confidence levels of smart investors and dumb investors. This indicator, tracked at sentimentrader.com, has shown a collapse in confidence by dumb investors, while smart investors remain fairly confident that market prospects will improve. I have upgraded this indicator to bullish.

Finally, let's look at the equity put/call ratio:

Click here for larger image.

This is a five-year chart of a 10-week moving average of the equity only put/call ratio shown in red. The S&P 500 is shown in black, and the green trend-lines relate to the average of the indicator and its standard deviation. The equity-only put/call ratio has trended higher over the last several years, so I have removed these longer-term-trend influences.

After reaching extremely bullish levels in March, this indicator slipped back into neutral territory as the market rallied in May and June. The latest decline has caused another increase in put-buying, but not to levels reached in March. This indicator has been upgraded to bullish status, but it is a marginal bullish position at this point.

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At the time of publication, Moore was long Conmed, Complete Production Services, CGI Group, Helmerich & Payne, Integral Systems, Life Sciences Research, Open Text, 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.