IRA Investing: Market Indicators Weaken

Just on the heels of my praise for the internal strength of the market, the indicator I presented (the advance/decline line) exhibited a negative divergence last week.

Even though the market averages were up strongly, there were more stocks declining than advancing for the week.

So far, this is only a one-week phenomenon, but it certainly bears watching.

Indicators Weaken

I still view the long-term market outlook as bullish, but there has been some further deterioration in the indicators that I use to forecast intermediate-term (two- to six-month) market moves.

I've only got one bullish indicator left, and it has declined from very bullish territory.

Let's look at it now.

Below is a five-year chart of the S&P 500 (black) and a 10-week moving average of put volume divided by call volume (red). The green lines relate to the three-year average of this indicator and its standard deviations.

PUT/CALL RATIO VS. S&P 500

Click here for larger image.

Source: TheAstuteInvestor.com

These volume figures include options on the indices, so, as buying puts on the averages has gained popularity, there has been an upward trend in this indicator. After a surge in put-buying related to the March decline in the market, this ratio has now subsided to a level that is still positive but just marginally so. Also, the direction of the indicator is clearly down, and it will fall into neutral territory soon if the market holds up.

With only one indicator bullish and two indicators neutral, my cash target has been raised to 8%. The actual cash position in my IRA was 7.1% at the end of last week.

A TBS International Adventure

Last week was the rebalance date for the five stock screens I have been using since last October. This rebalancing is a monthly screen that changes a few parameters in my main screen. Specifically, instead of relative strength benchmarks, I require that stocks be within 7.5% of their 52-week high. I also require that the ratio of average 10-day volume to average three-month volume be as high as possible.

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At the time of publication, Moore was long American Dental Partners, Apria Healthcare, Ameriprise Financial, Amerisafe, Becton Dickinson, Buckeye Technologies, Cal-Maine Foods, CF Industries, Consolidated Graphics, O'Charleys, CGI Group, ,Integramed America, Kinetic Concepts, Methode Electronics, New Frontier Media, Quadramed, Scholastic, Sauer-Danfoss, S&P Depository Receipts, TBS International, Boots & Coots, W-H Energy Services, Warnaco Group, Crane, Gardner Denver, Nova Chemicals, PepsiAmericas and Teleflex, 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.