Saturday, March 6, 2010

Investor Sentiment: Don't Stray Too Far From The Data

I always have the option of how I present the data. I can be negative or positive in my outlook and tone. But one thing I rarely do is stray too far from the data. I am flexible, but I remain data centric in my approach, and this forms the basis for my trading decisions. In the current market environment we find the sentiment picture to be pretty much what it has been for the last 6 months: the "smart money" is bearish and the "dumb money" remains bullish. Under these conditions, I know that the ascent of prices is likely to slow as either range bound trading will develop or an intermediate term top is imminent. I play with discipline and caution and expect the worst. Yet the market has refused to crack, and in fact, prices on the major indices are back at their 52 week highs. Failure of the indicators? Greed and fear gone from the markets? No and no! The price cycle as defined by greed and fear will play itself out. It always has and always will. I see no reason to stray from the data at this time.

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.

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. From the InsiderScore weekly report we get the following: 1) "market-wide and market-wide excluding-Financials sentiment was remarkably consistent week-over-week as insiders continued to send a strong sell signal"; 2) "selling was widespread and was paced by Russell 2000 constituents"; 3) the following sectors were noteworthy for increased selling: financials, retail, services, transportation, and restaurants.

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 value of the indicator is 56.92%. Values greater than 58% (arbitrarily chosen) are associated with market tops, and the red dots over the price bars indicate such. In addition, it has been my contention that the dip buyers bought the dip too early, and in all likelihood, they will be disappointed (unless they are selling now) as it will take lower prices to bring about a more lasting bottom and tradeable rally.

Shorter term Rydex measures continue to suggest that these market timers are warming up to higher prices. This data, which has proved to be very actionable, is now available for a nominal yearly fee as Premium Content. This service should help you to improve your market timing!

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


Theinflationist said...

thank you guy.
-your readers at theinflationist-

Anonymous said...