The market's short-term upward momentum may continue in the aggregate for a while, but I continue to watch my indicators for signs that a more defensive posture is warranted.

The biggest problems have to do with the readiness of speculators and smaller investors to embrace this rally and take more risk.

Last week, the ratio of

Nasdaq

volume to

NYSE

volume increased again to 1.6, well above the danger level of 1.4. This is the most negative of all my indicators and remains classified as very bearish.

The ratio of all sales by odd-lot investors divided by their purchases indicates bullishness on their part and remains classified as negative.

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A couple of my indicators remain neutral, but they are slowly deteriorating as well. In this group are the money flows into Rydex mutual funds that remain tilted toward bullishness and complacency on the part of these investors, and the ratio of odd-lot short sales to odd-lot purchases.

On a more positive note, the 10-week moving average of the equity-only put/call ratio is still near record levels and is rated as very bullish.

Finally, let's look at confidence levels associated with smart and dumb investors:

This is a five-year chart of a 10-week moving average of the difference between confidence levels held by smart investors and dumb investors.

This line is shown in red and is based on raw data provided by

sentimentrader.com

. The

S&P 500

is shown in black, and the green trend lines relate to the indicator average and its standard deviation.

The recent move into extreme high territory means that smart investors were very confident in a market rally, while dumb investors looked for a continuing decline.

That set of circumstances usually identifies a good buying point. Last week, the indicator began to reverse itself, but it is still classified as bullish.This set of indicators leads me to maintain my current target cash position at 27%. The actual cash position in my IRA at the end of last week was 24.2%.

I'm very thankful that I had a healthy portfolio position in

S&P Depository Receipts

(SPY) - Get Report

last week because, without that position, I might have suffered a decline in value even though the market had a good performance.

Leadership seemed to flip-flop as commodity-oriented names declined.

There is still no clear vision of leadership ready to take over from the commodity companies, and I feel pretty sure that it won't be financials or some of the other strong groups last week. This is the biggest problem I see for the market going forward.

I was able to find one new idea that was purchased last week. I took a new position in

Sauer Danfoss

( SHS), a diversified machinery company that specializes in equipment used to transmit and control power used in mobile applications. For example, the company makes transmissions, steering motors and electric drives.

The company has shown greater-than-industry growth of 15.7% in revenues and 26.8% in net income over the last five years. First-quarter results were excellent, with orders up 22% from one year ago and backlog up 56%. The company is enjoying good growth in Europe and in the Asia-Pacific region. Agriculture equipment markets have been a highlight.

In terms of valuation, the company sells at a 30% discount to the median company in the industry when looking at enterprise value/EBITDA.

In order to provide cash for the purchase and also to increase my cash position somewhat, I reduced my position in S&P Depository Receipts.

My biggest winner last week was

Integral Systems

( ISYS) after the company reported outstanding results for the first quarter. Revenue was up 55% and operating income doubled from one year ago. The stock was up 13.2% but still looks attractive at a 20%-plus discount to industry valuation.

My biggest loser was Stone Energy, after the company announced it was acquiring Bois d'Arc Energy. The stock was down 10.1% and seems very attractive given its low valuation and improved prospects with this merger.

My only question -- why is it that I always own the acquirer, and not the one being acquired?

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

At the time of publication, Moore was long SPY, SHS, ISYS, SGY and BDE, 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;

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