IRA Investing: Indicators Improve a Bit

Investors must determine how much of the bad economic news is already discounted by the stock market. We have had a huge decline so, obviously, some has been.

I use my indicators in an attempt to gauge how attractive the market is at any given point in time. As the stock market has fallen to new lows, my indicators have certainly improved in general, though they are not yet at extreme levels that would prompt me to make broad-based purchases.

The most problematic of all my indicators are the put/call ratios. In a market environment with this much weakness, I would expect option speculators to be buying puts heavily. However, that is not the case. I can only guess there has been so much weakness that the bears feel they are too late to be buying put options.

This needs to change and now that we are at new lows, it may bring out more bears. Certainly the financial commentators are negative enough to prompt more put buying. Currently these indicators are neutral.

On the more positive side, the money flows into the Rydex family of funds have continued to be bullish because the flows have been marginally to the bearish funds. If they were to become even more aggressive into these bearish funds for a week or two, this indicator could go to the extreme I am looking for.

Smart-Dumb Differential vs. S&P 500

The chart above shows a four-week moving average of the difference in confidence levels between smart investors and dumb investors in red. This data is provided by SentimenTrader.com and I am starting the chart in 2002. The S&P 500 is shown in black and the green trendlines relate to the average of the indicator and its standard deviation.

When smart investors are more confident than dumb investors in positive stock market returns going forward, this indicator increases as it did in the fall of last year. Unfortunately, the bullish readings dissipated rather quickly and the market fell to new lows.

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At the time of publication, Moore was long 3Com, Iamgold, Lincoln Educational, USA Truck and SPDR Gold Shares, 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.