Saturday, August 29, 2009

Investor Sentiment: 4 Charts Are Now 1

As investor sentiment remains at the same extreme bullish levels as last week, I have decided to forgo the normal 4 charts that I show and consolidate them into a single chart complete with a composite indicator that measures all levels of investor sentiment. This should be another time saving moment for our readers.

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!


Dacian said...

Hi Guy, thanks.

An interesting observation is the indicator is very good in timing the bottoms (whether intermediate or not). It's more difficult spotting tops (these are affairs, I know, you said it many times :)).

Have a look at the extreme bullishness we had at the end of 2006 (same levels as today on your indicator); a selloff took place only few months later with an extreme bearishness environment shown on indicator followed by higher prices; but the level of bullishness on this next leg up - ended mid 2007 - made a "higher low" on the "optimism level", which means that even that prices moved higher, the indicator was showing less bullishness than previos advance in prices. It might be a clue to look for, something like: today a correction is in the cards (extreme bullishness which is bearish) followed by another leg up; if the indicator shows less bullishness on this next leg up than today - more like mid 2007 - it might be a warning.

Unfortunately, you indicator goes back to 2004 only so we can't confirm this pattern; we only see it in 2007.

Guy M. Lerner said...


You are welcome!

About the indicator timing bottoms and tops; I would agree that bottoms occur with almost laser like precision -they are an event. Tops occur over time and while the indicator goes to an extreme -that event rarely (i.e., bullish extreme/ bear signal) rarely identifies the exact top; therefore, it is the trend of the indicator and unwinding of the bullish sentiment that is more important -not the extreme level per se. That would be my interpretation of it.

In 2006, one could interpret your observation as a divergence in that sentiment was not as extreme or bullish on the next leg up.

Lastly, there is only data to 2004 as this is when the Insider Score data is available.

Anonymous said...

For your prior article on TNX...

" A monthly close below the 3.342% would be further confirmation of lower yields."

Will it seems you got your wish... we close the month at 34.01 which is a consolidation traingle break down also...

The only thing to see now is that the break down for real or a false break down...