IRA Investing: Getting Positioned

It was a pretty ugly market last week, as we gave up almost all of the progress attained in the rally of the previous week. More bad economic news surfaced that indicated we are entering a period of slower growth or recession, depending on which pundit is making the projection. More bad economic news is probably coming, but the market has certainly already partially discounted the weakness.

I believe something else is going on as well. Last week was a big political week, and the likely outcome of the 2008 election is becoming clearer. I see the enthusiasm on the Democratic side far surpassing that for the Republicans, and I believe the market is in the process of discounting a Democratic victory. Can we elect a president who believes the free market needs substantial government help to work effectively? Can we elect someone who wants to remove the cap on taxable wages for Social Security taxes? Can we elect a president who wants to raise taxes on capital gains and dividends? Yes - we - can!

As this process of discounting unfavorable events goes on, my indicators are slowly improving, but none of them have changed enough to call for a reduction in cash position at this point.

The most disappointing indicators continue to show that smaller investors and some speculators still view the decline as simply a correction that amounts to a good buying opportunity. Odd-lot sales compared to odd-lot purchases are stuck at a low level in negative territory. Money flows into the Rydex family of funds are improving as these investors are shifting to a more cautious stance, but this indicator is still negative. Interestingly, volume on the Nasdaq increased last week relative to volume on the NYSE, and that indicator also remains negative. After the beating many of the technology stocks have taken, there is apparently still an appetite for increased risk.

On the positive side, odd-lot short sales compared to odd-lot purchases remains at record levels; this indicator is still rated as very bullish. The confidence level of smart investors compared to that of dumb investors increased nicely last week and is still bullish. Now let's look at the put/call ratio:

CBOE Put/Call Ratio vs. S&P 500

Click here for larger image.

This is a five-year chart of a four-week moving average of the equity only put/call ratio on the CBOE in red. The S&P 500 is shown in black and the green trend lines relate to the weighted moving average of the indicator and its standard deviations.

We have seen a nice increase in the put/call ratio in the last few weeks, indicating that speculators are buying puts aggressively in order to capitalize on the decline. This is a good indication that this decline will probably come to an end soon -- at least on a short-term basis.

Taking all these factors into consideration, my outlook remains neutral and my target cash position remains unchanged at 40%. The actual cash position in my IRA at the end of last week was 38.9%.

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At the time of publication, Moore was long Cal-Maine Foods, CommScope, Exactech, Frontier Oil, CGI Group, Helmerich & Payne, ICF International, Kinetic Concepts, Open Text, Rofin-Sinar Technologies, LS Starrett, Stone Energy, SPDR Trust, Sybase, URS Corp., U.S. Physical Therapy and Western Digital, 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.