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Monday, February 15, 2010

A Tradeable Bottom at Hand?

Many of my charts say the market may be in the process of making a tradeable bottom. In late 2009 and early (January) 2010 I took profits in my equity positions in both my personal and newsletter explore portfolios. Now I am back to buying as some of my stocks have fallen to their "repurchase levels."

Investors Intelligence Bulls over Bulls plus Bears Chart

Charts of the AAII (American Association of Individual Investors) Bulls minus Bears Index versus the market are key sentiment indicators for stock market technical analysis. Contrarian theory states the time to buy is when fear and pessimism are at a maximum since this usually occurs near market bottoms.
Click all graphs for full size images

You can clearly see from my chart of the Investors Intelligence Bulls divided by (Bulls+Bears) ratio plotted with the S&P500 weekly close over time that the level was at near record levels between four and ten weeks ago when I was taking profits. Now it has fallen enough to start accumulating again, which I have.


Rydex Nova/Ursa Ratio

This chart courtesy of schaeffersresearch.com shows the Rydex Nova/Ursa Ratio. This is one of the charts I find useful for my contrarian analysis to find good times to buy and sell equities.

The Rydex Nova/Ursa ratio is the ratio of the funds invested in Rydex bull funds divided by funds invested in Rydex bear (Ursa) funds. When investors who trade these funds are bearish, the ratio falls. As a contrarian, I like to do the opposite so I have been buying some stocks back for my newsletter explore portfolio that I took profits in recently at higher prices.

Here is a Rydex Nova/Ursa Ratio chart courtesy of "Sam" back to 2005:

I like to add to equities when most are bearish and the Rydex Nova/Ursa ratio falls. Likewise, I like to take profits when others are bullish and the ratio is high.

"Kirk's DOW CLX Model"

Click all graphs for full size images

This chart is very "busy" but you can see the lime green signal line has given some timely buy and sell signals. The last two signals were
  • Jan 7, 2010 SELL at DOW 10,618
  • Feb 8, 2010 BUY at DOW 10,058
Summary:

The above charts and several others I follow are bullish and saying it is a good time to buy. I like to add to equities when most other investors are bearish. Likewise, I like to take profits when others are bullish.

Market Timing Disclaimer: No sentiment indicator, or any indicator for that matter, is 100% reliable. I look at sentiment as head winds and tail winds. When sentiment is terrible, then it acts like a tail wind for your returns where you could see further declines, but long term, it is best to be buying when most others are selling. Likewise, if we see sentiment get too bullish, then I would consider lowering my portfolio asset allocation. It seldom pays to be buying stocks when EVERYONE is talking about stocks and how much money they are making at cocktail parties.

In addition, I am not market timing but for a small portion of my newsletter explore portfolio. I use market-timing indicators to tell me it is a good time to buy so I can add to positions when the market is down and thus help me overcome my fear to rebalance back to my target asset allocation. Likewise, when the market-timing indicators are saying to sell, they usually come when the markets are high where I want to be taking profits. The market timing indicators at market highs help me get over my greed and take profits. Now and then, I may make an asset allocation adjustment when the Fed Model and some other things I follow say the market is over or under valued. Some call that market timing, but I have stayed pretty close to 70:30 equities-fixed for many years despite the Fed model.

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