IRA Investing: Making Some Purchases

I mentioned in my last column that the market looked like it was ready to decline to new lows and, perhaps, to even violate the lows from 2002. While the Dow Jones Industrial Average was able to hold above those levels, the S&P 500 did violate these previous levels during the week of Nov. 17. This weakness caused most of my indicators to finally move into very extended bullish territory -- in some cases to levels not seen since the 2002 bottom.

Anecdotally, while I was traveling last week, I listened to a few stock market radio shows and was amazed to hear the outright capitulation on the part of some of these financial planner types. The message was that if you ever wanted to see any of your life savings again, you had better sell all your stocks and move into the planner's guaranteed-return product. This type of panic is what is needed before a good bottom in the stock market can occur, and I am encouraged that we are in the area of a major bottom now.

The least cooperative of my indicators are the various odd-lot data. Odd-lot short sales remain very low, but I now believe that the closing of various hedge funds is distorting the data. The other indicator I watch closely is the ratio of odd-lot sales to odd-lot purchases, and this ratio remains firmly in neutral territory. Interestingly, there was an increase in the ratio last week, perhaps indicating that odd-lot investors are waiting for a rally to sell.

The flows of money into the Rydex family of funds show a continued movement into the bearish funds. This is a bullish indicator, and while it's not at the same extremes as at the bottom in 2002, I still regard the indicator as very bullish.

Similarly, the equity put/call ratio jumped to extreme bullish levels two weeks ago. The ratio backed off a bit last week but I still classify it as bullish.

Finally, let's look at the difference in confidence levels between smart and dumb investors:

Smart-Dumb Differential vs. S&P 500

Click here for larger image.

This chart goes back into 2002 and is a 10-week moving average of the difference in confidence levels between smart investors and dumb investors shown in red. The data is provided by SentimenTrader.com. The S&P 500 is shown in black and the green trend lines relate to the average of the indicator and its standard deviations.

When the indicator is at high levels, as it is now, smart investors have a high level of confidence that the market is going to move higher, while dumb investors have very low confidence in a better market. This indicator is now extremely bullish and is at levels only reached for a few weeks near the ultimate stock market bottom in 2002.

Given the bullish posture of my indicators, I am willing to make purchases of attractive stocks or even to make purchases of exchange-traded funds that track the market averages. However, I still believe we will probably go through a further period of base-building that could include periods of weakness, so any purchases I make in order to reduce my cash position will be made on weakness. There was a brief period of weakness last Wednesday when some poor economic indicators were released, and I took advantage of that weakness to make some purchases for my IRA. My cash position is still high, however, at 60%.

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At the time of publication, Moore was long Conmed, Lincoln Educational, Super Micro Computer, Smithtown Bancorp, Sybase, USA Truck, Bebe Stores, Buckle, Cognex, American Ecology, Electro Rent, Healthcare Services Group, NutriSystem and TheStreet.com, 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.