The "dumb money" or investment sentiment composite indicator (see figure 1, a weekly chart of the S&P500) looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investor Intelligence; 2) Market Vane; 3) American Association of Individual Investors; and 4) the put call ratio.
Figure 1. "Dumb Money"
When combining the "dumb money" indicator with other metrics such as poor market internals and price under the 200 day moving average, we find that rallies tend to fail after 4 weeks of the "dumb money" indicator being neutral. Therefore, I would be a seller into rallies as the current set of conditions is more consistent with intermediate term topping action. In essence, we need to ask ourselves: what is going to propel prices higher? With sentiment no longer bearish (i.e., bull signal) and market internals lackluster, this bear market rally, which started in mid November, remains suspect.
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