BULLS & BEARS: We might be overdue for 10-percent pullback

January 8, 2007

The year-end entertainment tabloid news shows were full of young Hollywood starlets using questionable behavior and sultry wiggles to shock us viewers.

On other channels, reports cheered the successful year stock market investors enjoyed while simultaneously expressing awe over the size of Wall Street bonuses.

Last year provided lots of market gyrations, but the market never pulled back 10 percent or more. In fact, the stock market has been unusually calm for a long time. The last 10-percent drawdown occurred almost four years ago.

During the last quarter century, the market usually has hit a 10-percent air pocket about every couple of years. The only longer calm stretch than now was during the go-go 1990s, when we went seven years between 10-percent pullbacks.

Maybe the skies will stay clear and smooth, but I wouldn't be surprised if early 2007 gave us a little gut check. Fundamental data shows the economy is chugging along, but Christmas retail sales were a yawner and the housing industry has taken a tough punch.

Technically, there are a number of indicators that look more than a little questionable.

The New York Stock Exchange overbought/oversold indicator has spent most of the last four months in overbought territory.

The Rydex Ratio, which measures the flow of money in and out of bullish and bearish funds, is fairly bearish these days.

Meanwhile, sentiment surveys from Market Vane and Investors Intelligence are raising red flags.

Mutual funds, the vast majority of which lagged the indexes last year, have very low cash positions.

And finally, my favorite technical indicator, the Smart Money/Dumb Money Confidence Indicator, is at as bearish a level as it has been since late 2004. That time, the market dropped about 5 percent in six weeks.

In fact, a couple of weeks ago, the Smart Money/Dumb Money spread was as high as it was in late 2000. I don't have to remind you what happened after that.

These technical indicators are far from foolproof and, in some folks' minds, rank right up there with astrology. But if you want to make your own decision, look at them yourself at sentimentrader.com.

You might think I'm flipflopping since I've been an unabashed bull for the entire 2-1/2 years I have written this column.

No, I still believe U.S. stocks, especially growth stocks, have a great run ahead of them. I just think it might not hurt to raise a little cash or use an inverse exchange-traded fund to try to catch a market wiggle.

After all, any Hollywood starlet can attest that a well-timed wiggle can do wonders for returns!

Gilreath is co-owner of Indianapolis-based Sheaff Brock Investment Advisors, money management firm. Views expressed are his own. He can be reached at 705-5700 or daveg@sheaffbrock.com.
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