Sunday, September 6, 2009

Investor Sentiment: Marking Time

If a market top is developing, it will take several weeks to do so as the bullish extremes of the last several months need to be unwound. I have been stating the following for several weeks now: 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. When I first wrote those words on August 8, 2009, the S&P500 was at 1010.48; on Friday, the S&P500 closed at 1016.40. For the last 4 weeks, the S&P500 has been in a 60 point range. There is little follow through on either side of the equity markets. Outsize bets in either direction are not warranted. However, sector bets may still prove fruitful with commodity based sectors and ETF's outperforming.

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. The "dumb money" remains extremely bullish.

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

Company insiders continue to sell their shares to an extreme degree. See figure 3, a weekly chart of the S&P500 with the Insider Score "entire market" value in the lower panel.

Figure 3. Insider Buying v. Selling/ "Entire Market"/weekly

Our last look at investor sentiment comes from the Rydex bullish and leveraged (green) v. the Rydex bearish and leveraged (red) assets. See figure 4 a daily chart of the S&P500. After starting the week very bullish, these market timers threw in the tool as the market moved lower. Of course, if they had stayed only a few more days, Friday's lift would have bailed them out.

Figure 4. Rydex Bullish and Leveraged v. Rydex Bearish and Leveraged/ daily


DavidDT said...

PSX ready for correction

Tyler said...

Good stuff Guy. I agree that there seems to be a solid bid beneath the market. The Dumb Money indicators don't seem to jive with the general market sentiment. Usually when the sentiment indicators are flashing an extreme it agrees with the general 'feel' of what I am reading and seeing, etc. But this time, I am not feeling the extreme bullishness that this is showing.
Regardless, still positive.

talk soon,


Guy M. Lerner said...


Thanks for your contributions.

Tyler: Just look at volume...shriveled up like a prune. Sentiment is bullish by several different measures but stocks are for renting not owning. Everyone assumes they can get to the exits, but we know how that ends.