Market Brief: Monday, August 9, 2010

Each of our composites - Psychology, Monetary and Valuation - have multiple indicators, each weighted as to their importance in predicting future market action.  It is important to dissect each indicator, but the message comes from the total package and their inter-relationship.

For Psychology, we are very close to dropping to our third highest ranking due to readings on the ARMS Index, the VIX and the ISEE Open Interest, each close to losing some points simultaneously.  Our current Psychology ranking is at P2, and it could drop on any optimism this week.  The good news is that money supply has improved and could move our Monetary ranking from M3 to M2, our second highest Monetary ranking, on continued strength.  Valuation continues to have its highest ranking.  Regardless of what happens with Psychology this week, our outlook will remain the same with a very positive overall picture. 

We’ve been telling you that, with the market overbought, and some sliding in our psychology indicators, we’ve been doing a minor amount of fine-tuning.  And even though the stock market made some drastic moves on Friday, we do believe the improving nature of monetary conditions, along with the very undervalued stock market, is balancing out the scales and is still giving a bullish message. 

So far, so good.  Yet, as we continue on, do we continue to bet on our Asset Allocation Matrix’s bullish message, or do we listen to those messages that are bombarding us daily?  Bill Gross, Felix Zulouf, Nouriel Roubini, Alan Greenspan, and etcetera?

We’ll continue to give the vast majority of our time, reading, and research to our model and its positive readings. 

To continue reading, click here.

Don Hays