Saturday, February 20, 2010

Investor Sentiment: Bounce Mode

The investor sentiment data is consistent with a market that is in bounce mode. Following the late January sell off, investors really did not become too bearish. The subsequent bounce over the past 2 weeks has once again created a sense of complacency across our various metrics. In light of this, it will be difficult for the major stock indices to climb to new highs. Despite the recent short term strength, it is still my contention that we will need to go lower before heading meaningfully higher. I discussed the research behind this claim in the article, "Why I Think We Need To Go Lower Before Going Higher".

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 is neutral.

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. Insider trading volumes remain light although selling is picking up as prices on the major indices rise.

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 headed towards a bullish signal (suggesting too many bears) but it is not there yet. Once again, this suggests investors have bought the dip early, and in all likelihood, they will be disappointed as it will take lower prices to bring about a more lasting bottom and tradeable rally.

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

I ask myself one simple question every week: is this the market environment that will take me from here to there? From a sentiment perspective the answer is "no". The "smart money" and insiders have yet to turn bullish, and at best, only some of the shorter term Rydex data would suggest that the bounce may be with us for a few more days. This is not the environment where I will be making the big bet.


Anonymous said...

Look man, I'm not trying to be a dick here. But you have been wrong for about the last 6 months. Maybe your system works, maybe it did before. Maybe "This Time is Different." I don't know.

You have good insights in the big picture sense, but your market timing is weak. Now maybe you're minting money hand over fist. Maybe. Maybe you're shopping in the discount bin at Aldis. I don't know.

But you've been so far off the mark with respect to predicting the market that I can't help but tell you that it's going to be hard to beat the market with any consistency.

D-man said...

Anon, you need to look for some other blog for juice; this blog is more about risk (hence making money via exposure when risk is low) than beating one market or the other. Some might not like that, so those need to look for other places which beat the bench.

Guy, do you ever look at VIX? Do you see any edge in analysing that vs. S&P? thanks

Anonymous said...

Anon, if you can't interpret this data to make money, it must be above your head. This is great for determining how the market is viewing risk, money flows, and sentiment.

Guy M. Lerner said...

Anon #1:

I assume by market you are talking about the stock market?

But let's take me out of the picture for a moment here because I don't know anything, and substitute company insiders in my place. What would you say to them about their behavior for the past 6 months? They have been big sellers all the way up. I guess they were dummy heads too.

But we have gone over this numerous times. But I will defend my record one more time: 1) from March 2009 to end of May, I was long and strong; 2) cautious from May to June and then I was slow to warm up to the "Moonshot" in July; 3)from August to November, I was pretty correct in stating that the market would have an upward bias but to extract any money you would need to buy at the lows and sell at the highs -it was a grinding upward advance;4) starting in November, I started to write articles about sell something, sell anything...this was a good two months before the recent sell off that brought prices down below those November highs and many of the issues I highlighted in those articles are still below their November highs; 5)lastly, I will remind you of the other headwinds that I identified correctly and that was the market made little progress in the face of strong trends in gold, crude oil and treasury yields.

So I will try to be constructive. There is a lot of risk in the market, just like there was a lot of risk back in November. A lot of risk means don't bet as a heavy. From my perspective, there was a less risk back in March and this meant bet heavy. So I tend not to view my analysis as a light switch or an all in or all out phenomenon. For example, last week I had 16% exposure to the S&P500 plus an additional 58% exposure based upon the Rydex strategy I presented and another short term strategy for the QQQQ. Those positions were closed out at the end of last week and I am back to 16% exposure. That 16% is made up of SPY plus KRE (the regional bank ETF). So my exposure very much matches the words that I write in the blog...."this is not the environment where I would make the big bet"

So Anon #1, if you don't find value in what I do, then don't read the blog; the last time I looked, it didn't cost you any money to come to these pages. Also, if you want to capture every twist and turn in the market, then I suggest that you decide to do so because once you commit to one style of trading there will be multiple moves that your chosen style will miss. It is called trading as in "trade offs". Even buy and hold has risks but it never has the risk of under or over performing the market.

Anonymous said...

Guy, you really shouldn't waste too much time answering people like anon #1. Let other readers do it for you, or at least use a template for it :)

Anonymous said...

Anon #1 i agree with you. These indicators are useless. And the argument that you dont have to come to the site is not valid. If you publish something for public consumption you have to be willing to take the criticism.

Guy M. Lerner said...

Last Anon or what is post #6; I can take the criticism, but let's get the story and record straight.

And I really do mean it: if you don't like what I do or say, then you have two options: 1) don't come to the blog as no one is forcing you; or 2) use the information on the blog to bet against me because it is so obvious to you that I am persistently and consistently wrong that I am the ultimate indicator...just do the opposite of what I am doing.

If you do want to come to the blog and question what I am doing or what I do or disagree with me, then I welcome it. I don't have a province on market analysis. But if you do that, then please present your reasons for your opinions. It is not acceptable to just say that this or that is useless when the facts would suggest otherwise.