IRA Investing: Finally Making Money

It wasn't much, but finally obtaining a positive return this year feels better than losing money.

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.