IRA Investing: Getting Closer To a Bottom

It has become equally likely now that the market will continue lower and possibly even move below the 2002 bottom. Weakness in the advance-decline line and in the Value Line Geometric Average is forecasting new lows. This decline would likely bring all of my indicators into extreme bullish positions and could then be followed by a sharp and sustained market recovery -- a "V"-type bottom. It is in this latter scenario that I would want to be prepared to make some purchases. Otherwise, I will keep waiting for my screening system to identify stocks for purchase.

I continue to have one indicator that is in an extremely bullish position, although still not at levels associated with major stock market bottoms like 2002. This indicator is the difference in confidence levels between smart investors and dumb investors as recorded by sentimentrader.com.

The equity put/call ratio is in a bullish position and is headed for extreme levels, but it's not quite there yet. Similarly, the flow of money into the Rydex family of funds is also bullish but not at extreme levels.

Let's look now at the most problematic of my indicators, the ratio of odd-lot sales to odd-lot purchases:

Detrended Odd-Lot Sales/Purchases vs. S&P 500

Click here for larger image.

This chart goes back near the beginning of 2002 and shows a 10-week moving average of odd-lot sales -- sales of blocks of fewer than 100 shares -- divided by odd-lot purchases 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. This indicator has been adjusted to remove long-term trend influences.

These smaller investors are usually wrong at market turning points, so we want to see a high ratio of sales to purchases in order to forecast a better market. As the market was collapsing in October, these investors began to get concerned but when it stabilized, they reduced their selling and started buying again. Last Thursday, when the market jumped 500+ points, odd-lot investors bought heavily. I would like to see a substantial shift to the sell side, but that would require a movement by smaller investors to a more bearish attitude, usually prompted by further market weakness to new low ground.

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At the time of publication, Moore was long Conmed, Lincoln Educational, Super Micro Computer, Smithtown Bancorp, Sybase and USA Truck, 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.