Sunday, January 17, 2010

Investor Sentiment: They Don't Ring A Bell At The Top

There are two kinds of bulls: 1) there are those bulls who are intent on squeezing every last percentage point from this rally and who believe they can find the exits when the music finally stops; and 2) then there are those bulls who continue to have high expectations that the current market environment will yield strong returns. The latter type of bulls are unlikely to realize strong gains without a significant pullback, and by significant I mean that the pullback should get investors to think that the market is rolling over to such a degree that the current cyclical highs will never be revisited. The former type of bulls are likely overestimating their ability to get to the exits or identify the top before the next trader. Either way, complacency reigns as they don't ring a bell at the top.

The "Dumb Money" indicator, which is shown in figure 1, 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" indicator shows that investors remain 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 indicator is neutral to bearish.

Figure 2. "Smart Money" Indicator/ weekly

Figure 3 is a weekly chart of the S&P500 with the InsiderScore "entire market" value in the lower panel. Due to the start of earnings season, insider trading volumes remain light.

Figure 3. InsiderScore Entire Market/ weekly

Figure 4 is a daily chart of the S&P500 with the amount of assets in the Rydex Money Market Fund. When the value is low, investors are fully invested and remain complacent; when the value is high, investors are fearful and seeking safety of the money market fund. The current value is the lowest value since the March, 2009 rally began.

Figure 4. S&P500/ Rydex Money Market Fund/ daily


Anonymous said...

yes, this the first time I'm feeling of a 'process' top since early June. Fortunately for me 1/2 yr. ago I got out of 'short' positions in early July expecting a short term bounce. A 'process' top means I'm looking for range-bound consolidation top before a break much lower around spring time.

regards, Jimmy

Guy M. Lerner said...


It isn't so much a top or the top that I write about but it really has more to do with where and when do you want to put your money to work....

For the record, the range we have been in since September --upward bias but buy at the lows and sell at the highs to extract profits from this market -- was as I stated back in August....but now there is more risk of a sell off and likely there should be better spots to buy equities in the future

thanks for the input

Guy M. Lerner said...


I don't have an issue with folks donating money to Haiti and I strongly suggest, like you do, that the money goes to credible agencies.

I have spent a lot of time doctoring in the third world and I have been on 2 medical missions to Haiti back in the late 1990's. The situation is unfortunate; I have been asked to go Haiti by some local people and I am a little hesitant as I am not sure what a doctor could do without the necessary instruments of our profession. Sometimes we think we can help but truth be told, we cannot apply our developed world way of thinking to a third world country like Haiti.

My readers may think that is odd for me to say but you have to understand in the absence of electricity, clean water, food, and basic needs, high level medicine is not what is needed. Yes someone should triage the injured so that the worst off get help outside of Haiti but the most pressing needs will be food, shelter, water and safety. Doing surgeries under "Civil War" conditions is only going to lead to problems down the road for the patients afflcted. The real effort would be for these patients to be brought to US hospitals...outcomes would be better and it would be more efficient.

Anyway, thanks for the post Michael

Bryan said...

I agree, Guy. I am holding back sending any money yet to the cause until the initial wave of giving subsides. Just like with Hurricane Katrina and the tsunami, the cleanup will take tremendous time and money over many months or years, and we should not forget them after the media finds a new disaster to cover.

Guy M. Lerner said...


The money is important and it is great that you have your plan in mind but it needs to go to the right place and for the right things; I have seen this drill before and I have experienced the third world more than most; it is just a difficult place to be under normal circumstances and I can only imagine what is going on now.

Bryan said...

Yes. I plan on giving through my church, where I know a little better where the funds will go and when. It's times like these where the existence of God is called into question. But I believe God exists, and cares, and hurts to see his children suffer so, and will reveal himself in tragedy as well as prosperity.

Anonymous said...

The dumb money indicator has been extreme for 6 months and the market keeps rising. So how "dumb" are these people exactly? The dumbest people are those betting against the rally and constantly getting it wrong. Our prop desk is actively fading many blogs and newsletters calling tops. It has worked exceptionally well the last 6 months and will continue to work until these blogs STOP doubting the rally. The market is set to rally for another month at least, and rise at least 100 more S&P points into mid-February.

The dark pool transactions are still pointing to a fed that is actively propping up the market. Betting against that is the ultimate "dumb money", and many hedge funds and traditional smart money continues to get it wrong.

Guy M. Lerner said...

Anon: Your notion seems goofy at best...the market doesn't go up in spite of market participants; it goes up because of them!! It is like some cause and effect that doesn't exist and you believe that you have it all figured out.

Bryan said...

Anon is echoing a popular believe in the forums I read that the market rises on the backs of bears, and falls on the back of bulls. This means that the market can only fall when a majority are 'all in' and there are no more buyers. And vice versa at the bottom.

So these people watch for sentiment and feel that the market will continue up as long as there are bears that keep calling tops. The question though is 'are these bears generating the up-moves by constantly covering shorts, or are there other, larger forces at work moving the market up?'

Guy M. Lerner said...

Bryan: I am not calling for anything; I have been stating the same question for weeks: is this the time and place to put money to work?

What is your upside and is it worth it relative to your downside?

In these pages, I have not once stated that the trend is over but I have stated for over 4 months that it would be a grind higher and that it has been.

It is called trading as in trade is unlikely one will nail the top being 100% leveraged and go to completely cash at that exact moment the market rolls over; in lieu of that there has been a lot of good reasons to take profits along the way; I am sure on a day like today folks get a lot of angst over 1% low volume pop in the major indices

Anonymous said...

I find it rather amusing that no one has pointed out the unprecedented Fed support for the market that essentially shatters any hypothesis and theory based on what the market will do (based on historical anything). That said, this will truly be the market that goes further and long than anyone can think is humanly possible or rational (like the famous quotation).

My suggestion is to stay long, and stay often.


Guy M. Lerner said...

Ivan: You are right! The unprecedented Fed support might be the "reason" why this market goes further than anyone thinks is possible. So I wanted to acknowledge that.

But I still contend that there is no way of knowing when that end will be, and why we think things occur are probably not totally sufficient but probably fit some sort of thing in ourselves to make order out of chaos.

Thanks for contributing to the blog....

Anonymous said...

the big profitable speculative plays had been done for the first 6 months of the bottom. it's just the major indexes been moving higher for the past 3 months while fewer spec stocks been joining in. bulls are hesitant with some doubt while bears are going thru some soul searching. that doesn't mean the market doesn't go thru some consolidation to digest the 9 month move higher. I don't expect more than a 10% correction this year but we'll get the 20% no earlier than 2011. -- Jimmy