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Saturday, October 11, 2008

ISE Sentiment Turning Up

Charts of the International Securities Exchange (ISE) Sentiment Index plotted versus the Dow Jones Industrial Average (DJIA charts), S&P500 ( S&P500 Charts) and NASDAQ composite index (NASDAQ charts) are key sentiment indicators for stock market technical analysis.

click to view the PDF files
Contrarian theory states the time to buy is when fear and pessimism is at a maximum since this usually occurs near market bottoms.

click chart to view the full-size PDF file
10/11/08 Commentary: The 10 day moving average (DMA) of ISE Sentiment has turned up sharply and the 20 DMA is turning up yet the DOW has plunged, probably as mutual and hedge funds were forced to liquidate to meet redemptions after investors got quarterly statements and panicked.

I was a buyer last week with some stocks going higher and some continuing lower but I believe all were "bargain of a lifetime" values. Warren Buffett is been a buyer also. (See Warren Buffett on Goldman Sachs and Financial Bailout)

The 6-month treasury bill at 0.81% is but a fraction of the 3.05% dividend yield of SPY (Charts.)
The dividend yield on the S&P500 is currently higher than the 2.76% available with the 5-year Treasury Note.

I graph bond prices vs. the markets vs time. When you see not only stock investors but bond investors flee risky investment for the safety of short term Treasuries, then a loud gong goes off. The gong was very loud last week.

Like Buffett, I have no idea if or when the eventual bottom will happen but I rebalanced when the market was higher to take profits in equities. [See "take profits" pdf.] Now that equities are much lower, I've been rebalancing again by buying equities to get to my target asset allocation. I use a TINY bit of market timing to help me rebalance when the gongs sound and my target "fat pitch" price levels for the securities on my shopping list are reached. I know full well that stock can go lower, but long term, I am betting on the USofA while collecting a nice dividend on the SPY (SPY Charts) I bought Friday at $87.54 for my personal core portfolio rebalance.

Core and Explore Method: I recommend a "core" portfolio for about 80 to 95% of your funds and an "explore" portfolio made of stocks from my newsletter portfolio for the remainder. My newsletter stocks are volatile by design to add to overall returns, but you need a good core portfolio to sleep well at night. I offer several different core portfolios for both aggressive & conservative investors. My newsletter portfolios are ALL significantly ahead of where they started 2000 which I feel is quite an accomplishment given how well I did in 1998 and 1999. As of today, the S&P500 is well below its January 2000 level.

According to the ISE :

The ISE Sentiment Index is a unique put/call value that only uses opening long customer transactions to calculate bullish/bearish market direction. Opening long transactions are thought to best represent market sentiment because investors often buy call and put options to express their actual market view of a particular stock. Market maker and firm trades, which are excluded, are not considered representative of true market sentiment due to their specialized nature. As such, the ISEE calculation method allows for a more accurate measure of true investor sentiment than traditional put/call ratios. web site

For a current reading on what the ISE sentiment index charts mean and many other sentiment indicators mean, subscribe today and get the October 2008 issue of Kirk Lindstrom's Investment Newsletter for FREE!.

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