Stay in Cash—for Now

09/02/2010 11:38 am EST


Dan Sullivan

Editor, The Chartist

Dan Sullivan, editor of The Chartist, says negative sentiment and bad news has left the market oversold, but he’s not ready to turn bullish again yet.

The struggle between the bulls and bears continues as evidenced by the charts of the Standard & Poor’s 500 index, Russell 2000, Value Line Geometric, and Dow Jones Transportation Average.

The market averages are stuck in a trading range. For example, the S&P 500 has an upper boundary in the 1,130 area, with support in the 1,010 zone; the Value Line Geometric, upper range 382 and support 288; Russell 2000, upper range 675, support 588, and the Dow Transports at 4,520 at the upper level and 3,872 on the bottom.

We are now approaching the lower levels on each of the indices established at the market lows registered on July 2nd. If the averages can hold these support areas, it will be a very positive sign for the market over the short term. If these support levels do not hold, the market will probably see another round of selling.

Given the tremendous amount of negative news and the current oversold condition of the market, we would be very surprised if the lower boundaries of the averages are broken over the short term. The Chartist Overbought/Oversold Oscillator is currently at the same oversold level as seen at bottom on July 2nd.

Investors are scared as they are being barraged with terms such as “double dip”, “depression,” “death cross,” and “Hindenburg omen.” The economic news of the day is filled with reports of the exploding budget deficit, plunging real estate prices, high unemployment, and a political crisis.

These events have caused investors to lose their appetite for risk as $33.12 billion of money has been withdrawn from domestic stock mutual funds in the first seven months of the year. Investors continue to pour [a record amount of money] into bond funds. From a contrarian standpoint, the extremely negative news could be setting the stage for a great move in stocks.

It was just reported [last week] that the latest sentiment readings from the American Association of Individual Investors shows only 21% of investors are bullish, which is the lowest reading since the March 2009 lows. Again, from a contrarian point of view, these events are usually seen at market bottoms and not at tops.

The bottom line is that there is approximately $9 trillion of cash on the sidelines earning almost nothing, and when the stock market resumes its long-term up trend there will be an ample supply of cash to send stock prices higher.

[But] with our models [still] in negative territory, we continue to advise long-term investors to remain in a 100% money market fund position.

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