IRA Investing: Still Long-Term Bullish

The market was a bit more volatile last week, hitting a new all-time high for the Dow Jones Industrials and then falling sharply Friday on what commentators decided was a reaction to possible additional subprime mortgage problems.

I don't pretend to be an economist, so I don't think I have any unique insight into the mortgage market. I prefer to use my typical sentiment measures to ascertain how worried small investors and speculators are about the possibility of economic problems. Then I try to take an opposing position because, if small investors and speculators are very worried, I believe the market has already discounted the odds of something truly bad occurring.

Below is a five-year chart of the S&P 500 plotted in black on a weekly basis and the ratio of odd-lot short-sales to odd-lot purchases plotted in red. The green trend lines relate to a weighted moving average of this indicator and its standard deviations.

There has been a large increase in the volume of short-selling, at least partially because of the increasing impact of hedge funds, but regardless, these shares will be bought back at some point.

Odd-Lot Short-Sale Purchases vs. S&P 500

Click here for larger image.

Last week, odd-lot investors stepped up their shorting again to the second-highest ratio ever at 36%. The only higher week, at about 38%, occurred during the correction in March. These large short-selling ratios mean to me that, while we could continue in a correction mode in the short run, the longer-term outlook remains positive.

My intermediate-term indicators remain unchanged from the prior week. Two of the three indicators remain neutral and one remains bearish.

These indicator readings mean that there is no change in my target cash position of 15%. At the end of last week, the actual cash position in my IRA was 14.9%.

Sales and Purchases

There was a large amount of trading activity in my IRA last week. The major reason for the increased trading was the monthly rebalancing of my five-stock screen that is very similar to my main screening system, but substitutes increasing volume for high relative strength as one of the components. Stocks picked here, though, do need to be near their 52-week high.

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At the time of publication, Moore was long American Dental Partners, Apria Healthcare, Cal-Maine Foods CF Industries, Consolidated Graphics, O'Charley's, Columbus McKinnon, CGI Group, Integramed America, JDA Software, Kinetic Concepts, Layne Christensen, PARAXEL, Quadramed, Elizabeth Arden, Scholastic, S&P Depository Receipts, TBS International, Boots & Coots, W-H Energy Services, Warnaco Group, Nova Chemicals, PepsiAmericas, Schweitzer-Mauduit, UAP Holding and URS, 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.