Richard Moore, CFA, writes about strategies for asset allocation in IRAs.

Last week investors again suffered as the market continued to discount a future that looks very problematic. The only comic relief was provided by the political campaigns as mud-slinging escalated into name-calling and reminiscing about the impeachment hearings of the 1990s.

It is beginning to look, though, as if most of the negatives are becoming priced in to the stock market. On Friday, Bill O'Reilly had a segment titled "Will The American Economy Collapse?"

And then on Saturday,

The Wall Street Journal

had a front-page story headed "Jobs Data Suggest U. S. Is in Recession." When economic weakness becomes so well recognized and the fear of collapse permeates the discussions on mainstream TV, most of the stock market damage has probably been done.

While all is not roses, my indicators are beginning to reflect the probability that the worst is over. I say all is not roses because some of my indicators, while improving, are still not in position to forecast a better future and those indicators will require more time and possibly more weakness before they fall into line.

Specifically, the ratio of Nasdaq volume to NYSE volume remains too high and is still rated as bearish. This ratio flashed a warning in the fall of 2007 and has remained stubbornly high ever since.

I also have a couple of indicators that remain in the neutral area. The ratio of odd lot sales to odd lot purchases remains lower than I would expect given the magnitude of this decline and remains rated as neutral. The money flows into bearish Rydex Funds compared to the flows into bullish funds continues to improve but is still rated as neutral.

Last week my indicator that measures odd lot short sales compared to odd lot purchases improved to bullish from neutral. Odd lot short selling continues at a very high level. The chart that I presented last week, put volume compared to call volume on the CBOE, increased again last week and remains extremely bullish. Finally, let's look at the stock market confidence level of smart investors compared to the confidence level of dumb investors:

This is a five-year chart of a 10-week moving average of the difference in confidence levels between smart investors and dumb investors shown in red. The raw data is available at The S&P 500 is shown in black and the green lines relate to the indicator's trend and standard deviation. Currently, the confidence level of smart investors is moderately high and will probably go even higher if the market declines further.

The confidence level of dumb investors is about as low as it can go, indicating that his group really feels that an economic collapse is a real possibility. The difference between the two confidence levels is very high and increasing, leading me to rate this indicator as extremely bullish now.The indicators have not yet improved enough for me to upgrade my long-term outlook. It remains neutral.

However, I now feel that a substantially lower cash position is warranted and I have reduced my target cash position from 35% to 20%. The actual cash position in my IRA at the end of last week was 33%. I will be looking for opportunities to make stock purchases this week.Last week I increased my position in

S&P Depositary Receipts

(SPY) - Get Report

in order to reduce my cash position to previous target levels. In this environment, it is very difficult for me to come up with new individual stocks to buy because my screening system looks for strong stocks and, I believe, it is too early for this screener to identify market leaders in the next bull move.

I was, however, able to find one stock to buy last week. I took a new position in

Integral Systems


, a builder of satellite ground systems, equipment and software. The company has a long list of both government and commercial customers and has provided systems for more than 200 missions so far.

Integral Systems has had an excellent growth record over the last five years, increasing sales at an average annual rate of more than 20% and showing superior growth in net income of 37%.

The company has better than industry average return on assets and return on capital while maintaining a strong financial position with no long-term debt.

I consider the company to be part of the scientific and technical instrument industry although most data providers classify it as a business software and services company. Using either industry comparison, the company's stock sells at a significant valuation discount to the industry. For example, the company's current P/E is 15.6 compared to industry averages in the low 20s.

Price/sales, price/book and price/cash flow are similarly well below industry averages.

Enterprise value/EBITDA is at a 20% discount to the median company in the scientific and technical instrument industry.I'm optimistic that ISYS can continue to do better than the major stock market averages.The table that follows shows all the current holdings in my IRA:

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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