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 From the Trading Turret: January 26, 2005

Current Field Position

1. Offense or Defense? Please note that we have a change this week.

NYSE Bullish Percent is in Bull Confirmed Status – Xs @ 76%

Optionable Stocks Bullish Percent is in Bear Alert Status – Os @ 64%

OTC Bullish Percent is in a Bear Confirmed Status – Os @ 56%

2. Sector Bell Curve. Average Sector Bullish Percent is 63.23%

3. Favored Sectors: Drugs, Internet, Computers, Biomedical, Software, Electronics and Telephone

4. Strategy: Two of three major indicators have gone to DEFENSE. We are moving from offense to defense or the Capital Preservation Mode. There’s no need to panic. Remember, we have a game plan in place. We have been meticulously examining each position we own and have adjusted stop/loss points accordingly. We are trimming back positions and once stocks hit their stops, they will be sold and the proceeds placed into a money market fund. This will reduce our equity exposure slowly. Other position management tools include: taking partial profits, setting stops, writing covered calls and initiating positions in a few of the Rydex Inverse Funds. My goal here is to remain comfortable with what we have left on the table.

This week’s comment…

                    Not much has changed from what I said in last week's Trading Turret. The market continues to struggle with its oversold status with critical support at 1160 on the S&P 500. Even though 2005 is less than a month old, many investors are already frustrated. These folks became optimistic just as the topped and began its correction. So far this year, the S&P 500 has lost 3.3%, the Dow Jones Industrial Average is down 2.7%, and the NASDAQ Composite is down 6.5%. When you look at this in the context of the strong gains from the 2004 lows, these losses appear to be within the confines of a correction in a bullish trend. At least for now! As you know, I have some serious concerns about the market as we move through 2005. In particular, I think this year will be more difficult than many investors anticipate, with a pickup in volatility, valuation concerns, and slowing corporate earnings providing a headwind for the market. One trend that recently occurred that bears (no pun intended) watch is the fact that the S&P 500 undercut its December low last week. According to Lehman Brothers, since 1930 when the S&P 500 undercuts its December low in January, the probability of positive returns for the year dips to 50%, with the average gain being just 2.87%. On a short-term basis, the market has stabilized and posted gains so far this week. In a perfect world, I would like to see continued follow through with improving internal statistics to confirm that the market has made a short-term low. I don’t think that is the case this time around.

                    In last week's piece, I mentioned that the market was sufficiently oversold and the decline had helped to resolve the optimistic extreme I saw in investor sentiment. From a technical perspective, I am seeing several positive momentum divergences which often occur near lows. Breath has held up much better than the major indices during the correction. These are both positive developments that suggest giving the benefit of the doubt to the bullish case. In addition, the overly optimistic extreme in investor sentiment has been worked off. Ned Davis Research's (NDR) crowd sentiment poll reached an optimistic 72.7% bulls vs. bears on December 30, 2004 and the market has struggled since. The NDR crowd sentiment poll now reads a moderate 57.3% bulls. Rising put call ratios suggests investor pessimism on a short-term basis. The combination of an oversold condition, positive momentum divergences, improving investor sentiment suggests that the market is set to stage a rebound rally. Time will tell if the readings are accurate.

                    On the fundamental side, earnings season is now more than one-third complete with 187 of the S&P 500 companies having already reported. So far, 67% of companies have beaten estimates and 16% have disappointed. Analysts expect corporate earnings to grow by 15.3% from the 4th quarter of 2003. So far, earnings are easily beating those expectations by about 2.5%. Also, nearly 71% of the companies that have already reported are showing year-over-year profit margin expansion. In theory, the market should respond favorably to the strong earnings, but the market discounts future activity, and therefore, the market is more concerned with earnings growth slowing to between 6%-10% in 2005.

                    The Federal Reserve meets next week to decide on interest rate policy and it is pretty much a foregone conclusion that they will raise rates for the sixth time in as many meetings. A 0.25% rate hike would push the federal funds rate up to 2.50%. The Fed's language in their official statement will be interesting and could offer some important insight into the future outlook of monetary policy. One worry I have is that an overly aggressive Fed is one of the major risks facing the market. It seems that the Fed members are divided about the outlook for inflation. Consumer and producer prices moderated in December and the dollar has staged a rebound in recent weeks. Some Fed members were concerned that the declining dollar would heighten inflationary pressures. Fed Chairman Greenspan himself said that Fed might have to raise rates more aggressively to combat the weak dollar. Now that the dollar has strengthened a bit, the pressures on the Fed to act more aggressively may have temporarily eased. I say temporarily because some Fed members are very hawkish. St. Louis Fed President Poole recently said the Fed is keenly aware of mounting inflation and that they will eventually remove the "measured pace" language in order to prepare fighting inflation more aggressively.

Operations:

                    Year-end recaps have been posted, printed and sent to investors over the course of the last week. If you need P&L statements for 2004, please let us know. We’re doing them in the order that they are requested. Our new form ADV will be on the website in a few weeks. It’s in .pdf format if you need a copy for your files.  

Technology:

"Coming together is a beginning; keeping together is progress; working together is success." - Henry Ford

"Growth means change and change involves risks, stepping from the known to the unknown." - George Shinn

                    I’m making a few changes to the web site because I don’t like how it looks in small monitors. I hope to have this done fairly soon. If you encounter broken links or if something looks really out of kilter in your browser, please let me know.

                    If you have questions or would like more information, please contact us at (800) 427-0886 or via email at info@christyinvestments.com. Thank you for your continued support!!!

Have a great week!!

Bob Christy

 Robert Christy is a professional trader, author and money manager. Mr. Christy is also the President/ CEO of Christy Investment Group, Ltd., a registered investment advisory firm. At the time of publication, Mr. Christy may from time to time write about stocks in which he, Plato Advisors LLC, or Christy Investment Group, Ltd. has a position. In such cases, appropriate disclosure is made.  Under no circumstances does the information in this column represent a specific recommendation to buy or sell stocks. Mr. Christy appreciates your feedback and invites you to send it to rac@christyinvestments.com.