IRA Investing: A Bullish Bull Trap

Editor's note: This is Richard Moore's weekly update of how he is investing his IRA. In each update, Moore describes his macro view of the market and how it affects his approach to his IRA, reviews his portfolio holdings and performance and discusses the trades he has made and is considering. He combines market-timing with the use of stock screens in order to arrive at his IRA holdings. For a more detailed description of Moore's investment approach, please take a look at the first and second columns in this series.

All of my intermediate- and longer-term indicators remain steadfastly bullish. It would be very unusual for a decline of significant magnitude to occur, given the position of these longer-term indicators. But it's interesting to monitor sentiment among smaller investors to get a handle on what might happen in the short run.

To do so, I plot a chart of odd-lot buying vs. selling, and I've shown moving averages of this indicator in the past. Today, I would like to present the actual weekly data for the last five years. The odd-lot oscillator is shown in red; the S&P 500 appears in black. Readings above the zero line mean that the odd-lot investor is selling, and readings below the zero line indicate buying by the odd-lot investor. This is a contrary indicator, meaning that it is usually most profitable to do just the opposite of what the odd-lot investor, in total, is doing.

Comical Swings The weekly data for the last five years show a recent extreme in odd-lot investor sentiment

Source: Richard Moore

Click here for larger image.

The enormous swings in odd-lot sentiment during this correction are apparent on the weekly basis chart, and are almost comical. Every small decline has brought out the odd-lot seller, and every small advance has generated tremendous on-balance buying. The poor odd-lot investor must be on the verge of a nervous breakdown. Last week, as the market added to its gains from the very strong previous week, the odd-lot investor swung to a record bullish position over the five-year term of this chart. He is not going to miss the rally! But, as has been the case with every other rally this year, it may just be another short-term trap for the bullish odd-lot investor.

Because this is a short-term chart, I am not too disturbed by this behavior. But the best thing that could happen would be a pause or test in the short term that would bring this indicator to more normal levels. My four- and 10-week moving averages of this data are not in bearish territory, but that could change if the market remains strong in the short term.

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At time of publication, Moore was long Atlantis Plastics, AMX Corp., Benchmark Electronics, Black & Decker, Bluegreen, Briggs & Stratton, Cantel Medical, Charming Shoppes, China Petroleum, FPIC Insurance, Gulf Island Fabrication, John B. Sanfilippo, Metal Management, Michael Baker Corp., Silgan Holdings, Steiner Leisure Limited, Stifel Financial, United Fire & Casualty and Wesco International, though positions may change at any time.

Richard Moore, CFA, is the owner of QB Accounting Service in Angel Fire, New Mexico. Prior to that, Moore was manager of Taos Financial Strategies, working with a varied client list doing investment management, accounting, financial planning and taxes. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Moore cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send your comments to [e-mail].