IRA Investing: Market Prospects Look Good

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

In spite of the widening recognition that we are probably in a recession and all the proposed meddling by various politicians and administration officials in the free market, investors did fairly well last week.

In fact, my IRA is within spitting distance of turning positive for the year. There could certainly be obstacles still to overcome as we work our way through the year, but, as I have discussed before, I want to keep an unemotional perspective and simply use my indicators as a guide to like future market direction.

Those indicators did not change in any substantial way last week. The CBOE equity put/call ratio remains extremely bullish and indicates a continuing fear by option buyers. Similarly, the difference in confidence levels between smart investors and dumb investors as measured at remains extremely bullish, although it did decline last week. It would be most unusual to see a meaningful decline in stock prices with these indicators in such bullish positions.

Short-selling by odd-lot investors remains fairly high compared with odd-lot purchase levels, and that indicator remains bullish.

Money flows into the Rydex Funds shifted a bit to the bullish side last week, but not enough to cause any serious deterioration in the indicator, and it remains neutral.

Odd-lot sales compared with odd-lot purchases also remain neutral, even though they also exhibited some weakness as the market jumped last week.

The only indicator that remains stubbornly bearish is the ratio of Nasdaq volume to NYSE volume. Let's look at that indicator now:

Click here for larger image.

This chart shows a 10-week moving average of the ratio of Nasdaq volume to NYSE volume in red. The S&P 500 is shown in black, and the green trend-lines relate to the average of the ratio and its standard deviations. The indicator jumped sharply last fall, indicating a substantial increase in speculative activity and turning the indicator very bearish.

Since then, the ratio has retreated and even shown a sharp reduction a couple of weeks ago. However, the 10-week moving average has remained at a relatively high level, and last week it again showed a ratio over 1.4. It may require further market weakness or at least consolidation to bring this speculative activity down to more positive levels.

Considering all these indicators, I am retaining my cash target level at 6%. I continue to slowly reduce the cash position in my IRA, and it has now declined to 11.8% as of the end of last week.

My biggest problem with the stock market outlook and my own investment situation is market leadership. The screening system that I use to identify possible stocks for purchase currently has 64 names on it. One-third of those names are part of the energy sector of the economy. Clearly, commodity-oriented companies are continuing to lead this market. I am unwilling, however, to further concentrate my holdings, because I believe in keeping a diversified portfolio. I am happy with my current 9.5% allocation to the energy segment.

It is possible that another bubble may be forming in commodity stocks and that there will ultimately be a collapse of that sector similar to the past disasters in tech and housing. It is too early to forecast such an event, but I plan to watch my indicators closely for increasing risks in these areas.

Last week I sold my entire position in Western Digital ( WDC), 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 Rofin Sinar Technologies ( RSTI), because, as mentioned last week, I feel the stock is fairly valued at current price levels. Because I am still unable to identify many new stock purchase ideas, I added to my position in S&P 500 Depositary Receipts ( SPX), in order to move my cash position toward target levels.

I mentioned my biggest winner, Cal-Maine Foods ( CALM), last week, and the stock promptly got hammered (down 11.4% for the week) after reporting what I thought were excellent earnings for the February quarter. It's tough to assign a proper valuation to this company, but I believe it remains attractive even for new purchases because of its continuing good earnings prospects, its dividend policy and its low valuation.

Open Text ( OTEX) had a good week as it increased by 8.5%. I consider the stock to be a hold at current levels, but it is close to fair valuation now.

A couple of my energy stocks, Helmerich & Payne ( HP) and Stone Energy ( SGY), were up around 7% each, and this sector continues to perform well, as previously mentioned. Both of these stocks continue to look attractive.

Finally, US Physical Therapy ( USPH) was up 7.6% as investors reacted positively to the news that a director made some stock purchases. I continue to like this stock.

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

Symbol Name Purchase Date Cost Price Gain
Regular Holdings
CALM Cal-Maine Foods 4/16/2007 $13.30 $33.51 151.95%
CPX Complete Production Services 3/27/2008 $22.37 $22.92 2.46%
EXAC Exactech 11/5/2007 $21.00 $26.72 27.24%
GIB CGI Group 3/9/2007 $8.52 $11.29 32.51%
HP Helmerich & Payne 12/27/2007 $39.88 $49.41 23.90%
ICFI ICF International 9/14/2007 $25.28 $20.90 -17.33%
ISYS Integral Systems 3/5/2008 $25.90 $28.55 10.23%
KCI Kinetic Concepts 2/6/2007 $49.75 $47.02 -5.49%
LSR Life Sciences Research 3/11/2008 $24.22 $27.98 15.52%
OTEX Open Text 9/14/2007 $25.68 $33.99 32.36%
RSTI Rofin Sinar Technologies 9/21/2007 $35.06 $47.10 34.34%
SCL Stepan Co. 2/27/2008 $34.94 $38.70 10.76%
SCX L. S. Starrett 12/10/2007 $18.88 $19.08 1.06%
SGY Stone Energy 11/1/2007 $43.74 $55.73 27.41%
SPY S & P Dep. Receipts 1/14/2008+ $132.12 $136.89 3.61%
SY Sybase 11/13/2007 $25.79 $26.24 1.74%
USPH US Physical Therapy 1/17/2008 $13.98 $15.60 11.59%
One Month Screen
No Current Holdings
Performance Results As Of 4/4/2008 IRA S&P 500
Full Year 2007 33.0% 5.5%
2008 Year To Date -0.7% -6.2%
Total Return For IRA
S&P 500 does not include income for current quarter

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; click here to send him an email.

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