Investor Sentiment: Losing Conviction

The "dumb money" is beginning to lose conviction. The "Dumb Money" indicator has been in the extremely bullish zone suggesting too many bulls for 7 consecutive weeks now, and over that time, the S&P500 has lost about 1%.

The "Dumb Money" indicator is shown in figure 1. The "Dumb Money" indicator 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 "dumb money" is less bullish this week than last although their enthusiasm remains high. You have to wonder after 7 weeks of range bound price action if the bulls are beginning to lose their conviction. This price cycle has yet to play out as we have not seen a real resolution to this price range but the bulls appear nervous especially since the S&P500 was off 2.6% for the week. You would think this would make the bulls happy as you get to buy at lower prices especially with end of the month and end of the quarter mark ups squarely in front of us.

From a longer term perspective, last week I expressed my concerns for the market and my options:

To embrace higher prices with sentiment so extremely bullish, you must embrace the notion that we are in a new bull market. You must embrace the notion that higher oil and higher interest rates don't matter. You must embrace the notion that second derivative growth will lead to real, sustainable growth. You must embrace the notion that our housing and commercial real estate troubles are all behind us. You must embrace the notion that a PE of 150 on the S&P500 doesn't matter. You must embrace the notion that we can have an economic recovery without any meaningful change in unemployment. And we can go on and on and on....

I have picked my poison. It is a monthly close over the simple 10 month moving average on the S&P500. Once this occurs, I will add equity exposure (that is adjusted for the inherent risk of the asset (equities) and adjusted for the other assets in my portfolio). Personally, I don't like it, and this is at odds with my own analysis that leads me to state that this is not the proper launching pad for a new bull market in equities. But then again, the market cares little what I think or do. Nonetheless, this is how I am choosing to play it. The Faber strategy, which I discussed last week, is a strategy that helps me manage money and manage risk. It is not a "call" on the markets.

The "Smart Money" indicator is shown in figure 2. 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" is neutral.

Figure 2. "Smart Money"/ weekly