Hi Larry - A question on how I can use the COT in regards to my 401k. My 401k plan allows me to switch funds (i.e. aggressive growth, small cap, etc.) online whenever I wish. It also has the option of putting my funds into a cash account.

With the flip of the commercials in the COT last Friday, would it be a good time to transfer my funds from the currently held growth fund to the cash account? (This would, of course, assume that I follow the 'Smart Money' logic of investing my money.) I'm guessing this would be the best way to short the market in my 401k.

Dave Goble

Dave,

As I told Brandon who asked a similar question, I can't give you specific investment advice on what to do with your 401(k). But I can speak generally about it.

I personally would go to cash. And then I would only choose one of the mutual fund options that invest in stocks when the smart money has a bullish bias. I think that's especially true if you can go online and switch any time you want to. So, yes, I think you have the right idea.

Larry

Hi Larry - Thanks for the reply. I did read Brandon's question but I failed to look beyond the gold response and see that you did mention the cash fund.

I have been updating a spreadsheet on a weekly basis with the COT numbers. It has all sorts of numbers like 4, 8, and 12 week returns compared to the associated 'Blees' numbers. Using this chart, I am comfortable applying the Smart Money approach to my 401k account.

Thanks again. I continue to enjoy reading this forum and your weekly report.

Dave Goble

"I have been updating a spreadsheet on a weekly basis with the COT numbers. It has all sorts of numbers like 4, 8, and 12 week returns compared to the associated 'Blees' numbers. Using this chart, I am comfortable applying the Smart Money approach to my 401k account."

Very good job, Dave. That kind of due diligence and analysis is exactly what it takes to have the confidence to stick with a winning strategy.

Larry

You might also lok into rolling some of your 401k over into an IRA. That way you could go short with a Rydex or similar fund.

Wouldn't Dollar-Cost Averaging work since a 401(k) is a long-term investment? As stock prices go down, you're buying cheaper sahres. When the COT reverses, and we have an up market, those shares multiply in value. Would this not work better than being in cash, especially with today's interest rates? Again, it's a long-term investment.

Cory,

You ask a very interesting question, one that I think should be presented to the entire class.

So here it is…

If you were in a 401(k) in 2000 when the commercials first went net short. Would you have been better off dollar-cost-averaging from then until now?

Or would you have been better off going to cash when the smart money went net short, and then going long when the commercials went net long on 3/28/03?

I eagerly await the answer

Larry

I have two retirement accounts, a rollever IRA from an old job and a current 401k. I no longer contribute to the IRA so going long (mutual funds) to going short (cash fund) should not be a factor for dollar cost averaging (or is it?)

This is how I thought it out (I may be wrong. And if I am I'm sure I'll hear from someone if I am.) Say I have $100,000 in retirement and the S&P500 is at 1000. The commercials flip from long to short like they just did. I move my 401k from mutual funds to cash funds. Lets also assume the commercials are correct and over the next quarter the S&P500 drops to 900. Now the commercials flip back to long. I now have $100,000 (plus any contributions for the quarter) to by the S&P500 at 900. It appears I am way better off then just holding. The same would apply to my IRA where I did not contribute during the quarter.

Any thoughts on this?

David,

Actually the term dollar-cost-averaging is often misunderstood. It really means that you have a lump sum and instead of investing it all at once, you choose to invest it in regular intervals over a period of time. Contributing to a 401(k) is simply investing new money on a monthly basis. But it is commonly referred to as dollar-cost-averaging, so we can use that term.

The concept of dollar-cost-averaging is based on the assumptions that market timing is not achievable, and the investment in question will always go up over time and any declines will be temporary.

When it comes to the stock market, if you looked at a very long period of time over many years, you could make the case that it has always ultimately gone higher. However, you would have to have a very long time frame to have any assurance of that.

But where proponents of dollar-cost-averaging and I part ways is that I believe that successful market timing is very achievable. In fact, that’s what following the smart money by way of the COT report is all about.

Clearly given my example of going to cash when the commercials went net short in 2000, and then buying in March when they went net long, market timing would beat dollar-cost-averaging hands down. So it gets down to whether you think you can time the market or not. As followers of the COT report, we believe that we can.

So, yes, I believe that your strategy is a good one.

Larry