Sunday, March 15, 2009

Investor Sentiment: Still Bullish

Despite last week's big jump in the equity markets, the "dumb money" remains bearish on equities. These investors appear to be reluctant and still on the sidelines. The "smart money" is still bullish. This is a bullish alignment of signals suggesting that dips will be bought.

The "Dumb Money" indicator is shown in figure 1. The "dumb money" 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"/ weekly

The "smart money" indicator is a composite of the following data: 1) public to specialist short ratio; 2) specialist short to total short ratio; 3) SP100 option traders. The "Smart Money" indicator is shown in figure 2.

Figure 2. "Smart Money"/ weekly

A 10% "pop" in one week, and the "dumb money" still remains bearish. Maybe they know something? It doesn't seem likely as they (i.e., the "dumb money") were holding on since the January, 2009 highs and hoping that the November, 2008 lows would hold. Woops!! That didn't work out. It appears that the "dumb money" threw in the towel at the wrong time.

In any case, the "Smart Money" and the "Dumb Money" indicators remain bullish, and it is my belief that dips will be bought. After a 10% up move in a week, one would expect the market to pullback, but often times in the markets, there is a gap between our expectations and reality. The pullback will be bought. However, I just don't know how deep or shallow the "expected" pullback will be.

As stated last week, I believe this will be a counter trend rally within an ongoing bear market. This will not be "the bottom", and it is my belief that "the bottom" will take time (i.e., many more months) to develop.


Anonymous said...

The only thing dumb about market participants, is the labeling of money as smart and dumb. You clearly have next to know idea about the function of markets.

It is a place where needers of capital can meet the providers of capital.

The time frames used by different market participants can be a little difficult for some to understand. I put you in that "group".

Or are you a "specialist".

Elitist claptrap...

Anonymous said...

I do not agree with the last message.

Thanks to Mr. Lerner.
His successes and achievements speak for him.
His inputs and ideas are brilliants.

The anonymous participant must bring their views.
Where are your ideas, Mr. Anonymous?.
Have you got any?.

The "dumb money" can only criticize, but not known to contribute ideas and views.

There are technicals indicators (RSI, Macd...) thats show the market are up from days, perhaps weeks.
I am agree too whith this technical indicators.

Thanks again to Mr. Lerner.


Guy M. Lerner said...

Anonymous: I do respect other opinions but only when done properly. I deleted your first post for similar inflammatory comments. I am not sure what purpose your comments serve; if you have constructive insights or criticisms, they are welcomed.

Most importantaly, if you don't like what I am writing then by all means please don't read the blog.

I never make any claim that I have the holy grail of indicators; but I will say this about my work: at least I can provide some context (i.e., data) for my observations and indicators. And I hope this is what the readers appreciate and I hope this will differentiate me from all the others who "practice" TA.

Guy M. Lerner said...


Thank you for the support. I wouldn't say "brilliant" because that would imply that I am one of those: you know, the "best and the brightest" and therefore, I should probably be getting paid a lot of money like all those Wall Street types.

I do have a desire and determination to differentiate my work from others. In the end, I hope it is better. Do you ever see me talk about RSI, MACD or the other stream of indicators folk parade around? No. Why? Because I don't believe they work. I have developed my own tools through observation. I have backtested almost every idea concept or idea that is presented on this blog.

Guy M. Lerner said...

Anonymous (the offensive one): I re-read your comment and I will give you one thing and this comment has some validity: "The time frames used by different market participants can be a little difficult for some to understand." I disagree with this, however: "I put you in that 'group'".

I tend to believe that most market commentators/ analysts do not put any time frame to their "calls" or observations. For example, the other day a well known blogger made a bullish call on the market the other day and then said in effect that there is no hurry to rush right in and put all your chips on the table now. 3 days and 12% later, I would say that that person is standing with their hands still in their pocket wondering what happened. I would say that was not such a prescient "call" because the analyst said "no hurry". Furthermore, he offered no time frame. Should we hold for 3 days, 3 months, or 3 years. Many folks make many calls without ever offering some context or time frame.

Why I don't feel I am in that group is that I try to provide some context to my observations. Didn't I do that with the recent article on sentiment? I said this is the signal; it usually works best on the second week (and I presented data as to why this was so); I even gave the potential draw downs for each trade. Plus I even provided the average length of time per trade and this wasn't even a strategy--it was only the time the indicator stayed on bullish.

Oh well, I can't please everyone.