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IRA Investing: Finally Making Money

Richard Moore

Last week the volatility was to the upside and most market sectors participated although the commodity-oriented companies continued to lead the way.

I haven't commented on politics in a while but, looking at the Presidential race, I find it interesting that the market seems to do better when Barrack Obama is having problems. As I have mentioned in the past, I am apprehensive about a Democratic victory in the fall because increasing marginal tax rates and capital gains rates will, I believe, reduce potential economic growth and specifically hurt the stock market. Now that Obama looks to be a mere mortal, I think the market can focus more on future earnings -- at least for now.

Rather than trying to outguess the political or economic future, I use sentiment indicators to gauge the current market environment. Those indicators weakened a bit last week but are still more positive than negative.

The equity only put/call ratio on the CBOE remains very high and I continue to rate that indicator as extremely bullish. Similarly, the confidence level of smart investors compared to dumb investors is at a very elevated level and remains extremely bullish.

On the bearish side, I continue to be disappointed by the high level of speculation occurring in this market as measured by the ratio of Nasdaq volume to NYSE volume. This indicator remains extremely bearish.

The rest of my indicators are neutral. The level of odd lot sales including short sales compared to odd lot purchases is declining but still remains in neutral territory. Money flows into bearish Rydex funds compared to flows into bullish funds is also declining but remains neutral. Joining these indicators in neutral territory is the level of odd lot short sales compared to odd lot purchases. Let's look at that indicator now:

Click here for larger image.

This is a five-year chart showing the relationship between odd lot short sales and odd lot purchases in red. The S&P 500 is shown in black and the green trend lines relate to the indicator's average and standard deviations. This ratio has increased over time as hedge funds have become more popular, so I have eliminated that trend by dividing the 10-week moving average of the ratio by the 52-week moving average of the same ratio.

When odd lot investors get very negative and short stocks heavily compared to their purchases of stocks, it is an indication that market weakness has been overdone and a rally should be expected. This is what happened in late February and March when this indicator crossed over into bullish territory. Now, though, odd lot short sellers have backed off a bit, causing the indicator to fall back to neutral.

I don't view this small slippage in my indicators as very significant and have just nudged my target cash position up slightly to 22% from 21%. The actual cash position in my IRA as of the end of last week was 20.9%.

My biggest problem in managing my investments currently continues to be the lack of new ideas that I judge as suitable for new investment. My screening system is still heavily weighted with energy-related companies, but I am not willing to commit more funds to this area because of my diversification requirements.

I am concerned that the market will continue to narrow in terms of leadership and that this narrowing will ultimately result in a collapse similar to the one that occurred in technology in the 2000-2002 time frame and the more recent decline in housing related equities.

If the strength in energy-related stocks continues for another couple of months, we could be setting ourselves up for a more thorough washout than we have seen heretofore. I am watching these factors very closely.

Last week I sold my position in Open Text (OTEX Quote - Cramer on OTEX - Stock Picks) because I had held that stock for seven months and it no longer appeared on my screening system as a buy. I also sold one half of my position in Life Sciences Research (LSR Quote - Cramer on LSR - Stock Picks) because a combination of appreciation by that stock and a decline in the median company valuation of the research services industry left LSR looking fairly valued at current price levels.

I was unable to identify any individual stocks to buy so I added to my position in S&P 500 Depository Receipts (SPY Quote - Cramer on SPY - Stock Picks). Because of my inability to find new individual stocks to buy, I now have about 45% of my total portfolio in this ETF.

The energy-related stocks that I do own were again the stars last week. Complete Petroleum Services (CPX Quote - Cramer on CPX - Stock Picks) was up 12.3%, Stone Energy (SGY Quote - Cramer on SGY - Stock Picks) was up 9.6% and Helmerich & Payne (HP Quote - Cramer on HP - Stock Picks) was up 9.5%. The first two still seem to be very attractive when compared to industry median valuation but HP looks to be approaching fair value and I rate it a hold.

Technology stocks were also strong last week, leading to nice increases in Rofin Sinar Technologies (RSTI Quote - Cramer on RSTI - Stock Picks), which was up 8.6%, and Sybase (SY Quote - Cramer on SY - Stock Picks), which was up 7.9%. I continue to think that RSTI is fairly valued and that SY is attractive for purchase.

The table that follows shows all the current holdings in my IRA as of last week: