See figure 1 a weekly chart of the S&P500 with the composite indicator in the lower panel. The indicator looks at investor sentiment from 2004 to the present.
Figure 1. Investor Sentiment Composite
So what am I measuring? Normally we have 4 charts looking at:
1) the "Dumb Money" indicator; 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.
This week, the "Dumb Money" indicator remains very bullish to an extreme degree.
2) the "Smart Money" indicator; 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.
This week, the "Smart Money" remains neutral.
3) the Rydex bullish and leveraged v. the Rydex bearish and leveraged assets.
This week, the Rydex bullish and leveraged traders outnumber their bearish and leveraged cohort by more than 2 to 1.
4) the InsiderScore entire market insider buying and selling.
This week company insiders continue to sell in record numbers.
So our composite indicator requires 13 different types of data and encompasses multiple investor groups such as retail and professional investors and company insiders. The indicator is a very comprehensive look at market and investor sentiment.
As expected, investor sentiment shows a lot of bullish optimism (while company insiders are net sellers to an extreme degree), and this puts our indicator in the extreme optimism zone, which is a bearish signal.
So what does this mean? It will likely take several weeks for such bullish extremes to unwind. In essence, what I stated several weeks ago still stands: 1) the greatest gains are behind us; 2) the markets are to trade in a range with an upward bias; 3) there will be a bid under the market; 4) it will be tough to short or bet against this market for the foreseeable future. That sounds like the current market as we come into the last week of Summer!