Sunday, September 27, 2009

Investor Sentiment: A Pullback Would Be Healthy

A pull back should be viewed as healthy within a strongly trending market. However, the "moon shot"rally that started in July, 2009 has been characterized by nary a pullback, so the current 2.2% drop in the S&P500 must be producing a little bit of angst amongst the bulls. Relative to the past 2 months, a 2.2% drop counts as deeply oversold. But really, very little has changed. The major indices are still within ascending channels. Investor sentiment remains extremely bullish. As I have been stating for several months now, there is an upward bias until the extremes in bullish sentiment are unwound.

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 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. InsiderScore Entire Market/ weekly

Figure 4 is a daily chart of the S&P500 with the amount of assets in the Rydex bullish and leveraged funds versus the amount of assets in the leveraged and bearish funds. Not only do we get to see what direction these market timers think the market will go, but we also get to see how much conviction (i.e., leverage) they have in their beliefs. Typically, we want to bet against the Rydex market timer even though they only represent a small sample of the overall market. As of Friday's close, the assets in the bullish and leveraged funds were greater than the bearish and leveraged by a ratio of 2 to 1; referring to figure 4, this would put the green line greater than red line.

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


Anonymous said...

"...this would put the red line greater than green line."

Am I misunderstanding the chart ?
Quite the opposite appears to be true. Please clarify.

Thank you.

Guy M. Lerner said...


Corrected!! Thank you

Kevin said...

Interesting - the Rydex bearish didn't increase at all on this decline.

Guy M. Lerner said...


One interpretation of this could be that the market will do what hurts the most; in other words, the bears have thrown in the towel as they no longer are shorting and the bulls continue to buy the dips -- we are not talking dips measured in days but hours as they cannot wait.

You could imagine that this is a good set up for shorting as Rydex shorts have given up and rydex longs are too bullish.

Just a thought....your thoughts?

dacian said...

I do agree, bears are scared like death shorting; what's interesting is as you show, there is no much buying power left. But I think there are so many dark pools of money we don't see (we all know where from that comes).

So yes, it might be a good opportunity to short; use stops!

My feeling overall this is not more than a game of "who's fooling who and take the most money from the other people", which is a shame to be honest.

Fred said...

If you don't mind, how do you calculate the Ryder bullish and bearish indices?

Guy M. Lerner said...


Not a problem

First I have a database that goes back to approximately 2000; in 2004 I was lucky enough to exchange work for a complete database and I have been tracking ever since; I use to call in on a phone # and jot down the values by hand every night; around 2005 Rydex went to the internet. You can find recent data at this link:

To calculate the bullish and leveraged or bearish and leveraged, I take all the assets in the bullish oriented funds that are leveraged and sum them; I do the same for the bearish and leveraged.

Reader Dacian asked me in these comments a couple months ago about back tested results of the Rydex bull and bear leveraged ---is it a contrarian indicator? The answer is yes but there are a few caveats. I will share that data shortly, but essentially I think the results support the notion that it could be used as a contrarian indicator