IRA Investing: Indicators Continue to Weaken

The last couple of weeks have had something for everyone. Bulls can point to some big 200-point upside moves, but the bears can also take comfort in the large declines that seem to inevitably follow the rallies. The end result, as was again the case last week, is that the major averages end the week down slightly. Some of the small-cap averages are doing better, but not enough to really make anyone feel better.

Politics are center-stage now, and Barack Obama continues to hold on to a small lead over John McCain in the polls. I continue to feel that an Obama victory would be negative for the stock market, and the market may in fact be discounting that outcome now.

My indicators have not improved during the last couple of weeks, even though the market has been drifting lower. The ratio of odd-lot short sales to odd-lot purchases that I discussed last week continued to move lower and crossed marginally into bearish territory last week. The other odd-lot indicators remain categorized as neutral.

The difference in confidence levels between smart investors and dumb investors continues to deteriorate but is still ranked neutral.

Similarly, the money flows into the Rydex family of funds continue to be weighted to the bullish side and, therefore, the indicator is declining but still neutral.

Finally, let's look at the equity-only put/call ratio:

Detrended CBOE Put/Call Ratio vs. S&P 500

Click here for larger image.

This is a five-year chart of a 10-week moving average of the equity-only put/call ratio shown in red. The S&P 500 is shown in black, and the green trend-lines relate to the average of the indicator and its standard deviation. Adjustments have been made to this indicator to remove long-term trend influences.

Put-buyers were very aggressive back in March, and this indicator recorded extremely bullish readings. When the market rallied, the indicator retreated to neutral territory but then increased to bullish levels again when the market hit its lows in July. Now, though, the put/call ratio has declined again, falling to a neutral level last week. Currently, there does not seem to be a high level of conviction by these option buyers regarding the near-term market trend.

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At the time of publication, Moore was long Altra Holdings, Conmed, Complete Production Services, Emcor Group, CGI Group, Integral Systems, Layne Christensen, Life Sciences Research, Omega Protein, Open Text, Stepan, LS Starrett, Stone Energy, Sauer-Danfoss, Super Micro Computer, Synnex, SPDR Trust, Sybase and West Pharma Services, 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.