Sunday, January 31, 2010

Investor Sentiment: I Am Surprised

From the highs three weeks ago to the lows of this past week, the S&P500 has slid about 7%. This is not as great as the mid- June to mid- July, 2009 swoon, which saw the S&P500 lose about 10%. So maybe investors are right in not being too concerned about the pace of the current downdraft, and when looking at the sentiment indicators this week, that is exactly what we see: complacency amongst the "dumb money" and indifference by the "smart money". Despite any short term gains over the next week, this still is not a high reward, low risk investing environment.

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 weekly chart of the S&P500. The indicator in the lower panel measures all the assets in the Rydex bullish oriented equity funds divided by the sum of assets in the bullish oriented equity funds plus the assets in the bearish oriented equity funds. When the indicator is green, the value is low and there is fear in the market; this is where market bottoms are forged. When the indicator is red, there is complacency in the market. There are too many bulls and this is when market advances stall.

Currently, the indicator is red and the value exceeds 58%. In other words, greater than 58% of the assets are in bullish funds (leveraged and non leveraged) relative to all of the equity funds. There is nothing magical about the number 58%, but intermediate term swings in the past 10 years have been identified when this indicator exceeded the 58% mark. These extremes in the indicator are noted by the red dots on the price chart and the maroon colored vertical lines.

Figure 4. Rydex Total Bull v. Total Bear/ daily

Lastly, I must admit that I am surprised by the sentiment picture this week. I thought the indicators would reflect a less bullish posture amongst investors. The pace and breadth of this sell off seems different than any that have occurred through out this rally. And let's remember this: 1) the sell off is coming on the heals of a 70% plus gain in the S&P500; 2) many leading sectors and ETF's have broken down --emerging markets, China, and metals come to mind; 3) safe havens, like the Dollar and maybe Treasury bonds, seem to be attracting investors; 4) good news, like strong earnings and positive GDP, is being met by selling. It is hard to believe that investors can remain this complacent, but the data tells a different story.

The sentiment indicators still suggest that better buying opportunities lie ahead, and the best way to see investors turn from bullish to bearish (i.e., bull signal) is to have lower prices over the next weeks and months.


Dave Narby said...

Hi Guy,

Amazing work, as usual.

Did a bit of micro analysis of your last chart posted, came up with this.

A lot of bulls are waiting to get short on a bounce, seems like this would be one way to leave them out cold (give them practically no bounce to speak of)

Guy M. Lerner said...


Thanks for the compliment! Those are always nice....

While this data looks real good and it is, I always caution about interpreting any data point or indicator as a holy grail. This is just one piece of evidence to suggest that a top is in

Onlooker said...

Complacency is indeed rampant. Much different sentiment than existed on previous pullbacks.

Dave Narby said...

Thanks, Guy caution noted. However, looking at the smart money indicator, it seems to me as if it's slowly trending down as this rally goes on.

Which makes sense, as the smart money is doubtless wondering where the money to keep this market aloft is coming from...