Sunday, June 28, 2009

Investor Sentiment: Summer Doldrums

It is the end of the month. It is the end of the quarter. It is the week before a holiday. This gives the market a slight upward bias for the coming week. In the intermediate term, the "Dumb Money" indicator remains bullish to an extreme degree, and typically this is a bearish signal. This is a real head wind for the market. Since the "dumb money" turned bullish 8 weeks ago, the S&P500 has lost a little more than 1%, the NASDAQ 100 is up about 6% and the Russell 2000 is flat. For the week ahead, I suspect the shorter term bullish bias and the longer term bearish bias will make the markets choppy and range bound. It is the summer doldrums!

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" Indicator/ weekly

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" Indicator/ weekly


Taggart said...

Thank you for this insightful post. For the benefit of those seeking to learn more about sentiment indicators, would you please elaborate on the data sources(the one you mention publish many time series) and the construction of the composite indicators?

Guy M. Lerner said...


Thanks for the compliment; with regards to the indicators that I use, I tend to create my own work and therefore, I am a bit reluctant to just give away what has taken years to develop. When I say "develop" I don't mean that I tweak this parameter or that one to fit all situations.

As far as the data I use, it is in the article, and while I don't give the specific formula or secret sauce away, I tend to use simple things like the most extreme reading over the prior 52 weeks or some such thing.

As far as indicators are concerned and market analysis in general, I would say try not to rely upon something that requires you to thread the needle; it is just to hard to do when it comes to the market.

Anonymous said...

I've been a reader of your blog for a few weeks. Thank you for the great work, and the insights this blog provides. As I did some back testing with S&P Options data for the last 10 years and found it to be a good indicator only during turning point events Ex: Late 2007 & Mid 2008 ( probably due to hedging reasons or investors playing it safe with options).Without giving away the secret sauce,What induced you to include Put Call ratio as a bearish indicators

Guy M. Lerner said...


Good question. I don't mind giving my thinking on why I do this or that. I had noticed that a lot of folks used this (Put Call ratio) data set; some used a 21 day moving average and others used a 10 day; it worked well when it worked.

Now when I set out to use some data or strategy, I want it to work across the totality of the data or at least I want to consider all the data available; I don't want to consider the 2 points to the left on the chart and ignore the 5 before that. So I chose the put call data because I had data going back to 1987, so this included a good chunk of time and many ups and down -albeit a strong secular bull market. The other reason to use was it represented a different section of market timers - option players.