Saturday, April 24, 2010

Investor Sentiment: Mockery

The market continues higher, which you are well aware. The sentiment indicators continue to show extreme bullish sentiment amongst the "dumb money", an indifference by the "smart money", and selling by insiders. These are bear signals. In a sense, the market continues to make a mockery of the sentiment indicators. But let's face it, all indicators - whether fundamental or technical - are broken. There is no analysis or tool that could have predicted such a strong and persistent price move 14 months ago. There is no analysis or tool that can predict when this period will end. I hear and read all sorts of reasons why the market will go higher, but from this perspective, most of it is just nonsense as market participants look to explain the unexplainable. This market only goes in one direction rendering all analysis useless. Why do market analysis when there is only decision to make? Some time in the future, these tools will find their mojo again.


And now this from the Department of Broken Records....

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" indicator is bullish to an extreme degree, and this implies that a price move is either nearing its end or the ascent of prices is surely to show. This is our expectation 85% of the time. As discussed previously, not only is the current value extreme it is also less than prior extremes suggesting decreasing bullishness despite higher equity prices. This remains a noteworthy, yet unconfirmed, negative divergence.

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: transactional volume decrease as the quarter closed but insiders continue to sell with conviction and buy sporadically.

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 67.52%. Values greater than 58% (arbitrarily chosen) are associated with market tops, and the red dots over the price bars indicate such.

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

Shorter term Rydex measures continue to suggest excessive bullishness. This data, which has proved to be very actionable, is available as Premium Content. This service should help you improve your market timing.

13 comments:

Anonymous said...

I can think of only one reason why the market continues higher: nobody (the dumb money) can make a return any other way--at least, certainly not without taking risks. Bank deposits pay nothing, property is no longer lucrative, and bond funds are stagnant since early 2010. Therefore...throw money at the market. Dumb? Perhaps. But who is going to sell when there are no alternatives,and when interest rates are never going up again!?

hettygreen said...

I wonder if at some point in the distant future of these dysfunctional markets we see the dumb money bearish, the smart money bullish (both in unprecedented extremes) and yet equities fall relentlessly day after day, week after week, month after month?

numbersgame said...

Hey Doc,

Have you identified an "uncle" point for your SDS position? Do you feel we are at a point where MAE will end, and the market will move in you favor? If so, how do you determine the point at which you close the position if the market does move down?

I ask as I too am holding a similar position, but in TZA. I almost cried uncle Friday, but hesitated as I think when I do, then the market will turn. But, I can't help but repeating to myself the phrase "the worst thing than being wrong is staying wrong".

I look forward to any comments related to how you will manage your SDS position.

Best regards,

NG

Joyce said...

Guy, please respond joyce2caps@gmail.com. Patrick Doyle's ex.

Anonymous said...

I believe there is a simple reason why this market is going higher.
We have to many retail traders ( over 90% of them lose money) shorting it. Every poor sucker who is short and has a stop is willing to buy this market even at the higher price. And guess what! the sharks will sale it to him at that price and put the money in the bank. This is how markets work, never mind the indicators

Anonymous said...

Don't buy the "Story"! This is a market recovering from continuing hyper debt and TOTAL government experimentation while bankster's orchestrate worldwide for domination by the few and the elimination of smaller competition. These entities are immoral and only looking out for their survival at our expense and not our financial well being. Today's investment circumstances are unknown to any of us alive today, and, yes Guy, none of the chart 'Trading' analysis and rules we've relied upon will work. Our leaders lie under oath as bernanke recently said about not monetizing the debt, until Ron P brought it up, Barnanke stonewalled him and all the other "paid for" Senators changed the subject. This is their survival game at our expense and the rules are changed daily as we adapt. We as a group forum should be discussing methodoligy and not smart vs dumb when both are the same individuals being fleeced. However, what you call the smarts seem to me selling financial assets and buying outside the US real estate for a long term hold and no short term profit. The real smart money is the average US "Joe" who is uninvested and hopes one loses everything. We all should be speaking and looking to Joe and not to the stock exchanges and charts in the US to find where to invest. If Joe limited wallet wants windmills, buy windmills, otherwise stay away from the US markets. Trading is "out", investing is "in" until the majority in funds without stops and the traders with stop limit orders are set for the long term fleece. I don't have the answers either, but we need to stop buying into the old wallstreet stories as we are the dumb money and our dumb money charts are the banksters free road map.

Anonymous said...

I can be wrong, but in my opinion the reason of this bullish action is political.

Wall Street is waiting for what happens with the financial reform, and they are playing the momentum. I mean, they are pressing by the moves of the markets. If there's a wrong decision (for them) they can take the market down, and it seems that the FED and White House doesn't want a bearish market.
I Know is simple as an explanation, but the lasts moves in the markets seem a game about rumors.

the indicators are not wrong, but the markets go up because the great capital want it that way, but we don't know how long...

Mike C said...

There is no analysis or tool that could have predicted such a strong and persistent price move 14 months ago. There is no analysis or tool that can predict when this period will end. I

I hear ya. I am very ambivalent about the magnitude of this rally in the time frame and its continued sustainability.

That said, there are other technical metrics that point to continued bullishness beyond just a "story to explain it". Here are just a few:

http://www.tradersnarrative.com/a-very-rate-breadth-thrust-buy-signal-from-ndr-3979.html

http://www.tradersnarrative.com/sentiment-overview-week-of-april-23rd-2010-3799.html (retail still NOT overweight stocks)

http://www.tradersnarrative.com/explaining-the-unstoppable-momentum-of-the-market-3944.html

http://www.tradersnarrative.com/coppock-guide-signals-the-start-of-new-bull-market-2622.html

I think the interesting question/dilemma you raise is to what degree do you on purely sentiment measures versus purely technical price action measures when they seem to conflict. I don't know, but my view is don't fight the trend. I think a better signal would be when we see some sustained technical deterioration while dumb money sentiment stays bullish

Guy M. Lerner said...

I want to thank everyone for the nice comments and discussion

A lot of supposedly very smart folks are flummoxed by the current market environment. Have a read of Hussman here and Grantham here.

The studies cited at Traders Narrative are just several of the studies I have a problem with; however, I do have respect for the author of the blog as I believe he is doing a good job. I note in your links a reference to the Coppock guide; I am very familiar with this indicator that works some of the time in some markets. To get at what I am talking about, a weekly version of the Coppock guide that I use is actually turning down on Gold and the gold ETF (GLD) and this turn down is actually a negative divergence. However, do I hear or see anyone who uses this indicator stating that gold is a sell? You cannot use the indicators only some of the time, and you have to apply them consistently all of the time. So this is what I mean about the current use of indicators; we have all these rare breadth signals and such and they don't mean much.

The trend is up and that is what we can agree upon.

Guy M. Lerner said...

One more thing: it is no secret that I am short the market and I am getting shelled!!

I will provide my thoughts on this position and how I intend to approach the coming week.

Mike C said...

I note in your links a reference to the Coppock guide; I am very familiar with this indicator that works some of the time in some markets. To get at what I am talking about, a weekly version of the Coppock guide that I use is actually turning down on Gold and the gold ETF (GLD) and this turn down is actually a negative divergence. However, do I hear or see anyone who uses this indicator stating that gold is a sell? You cannot use the indicators only some of the time, and you have to apply them consistently all of the time.

Guy, appreciate the response, but I disagree on this point. In fact, I don't think you have to apply an indicator consisently. NO SINGLE INDICATOR IS PERFECT OR FLAWLESS. You and I both know this as there is no magic bullet in the market.

So my view is you look at the all the various indicators together and try to make some big picture call based on the preponderance of evidence. If you are trying to diagnose something very complex would you rely on a single medical test or run a battery of tests?

With gold, at least IMO, there are numerous reasons, many technical to be long-term bullish so why would I change my view based on a single metric like Coppock when I can find a bunch others to support a bullish outlook.

I'm utterly perplexed by S&P 500 at 1200 given what I think I know about the underlying economy, and your excellent sentiment work along with others suggests at the very least a short-term top should be near. But what is more likely over the next 12-18 months. 1400 or 1000. I think these various indicators point towards 1400 more then 1000. I am cautiously long with a decent cash position ready to hit the sell button if it looks like this rally is over and we are going back below 1000

Anonymous said...

Shorting this madness has certainly not been a pleasant experience for us bears.

I'm beginning to think that while sentiment is certainly a useful indicator it's not worthwhile from a risk adjusted perspective to trade the counter-trend moves, at least.

I wonder how the sentiment measures would have shaped up during the 2000 stock market bubble - Soros must have taken one hell of a hit from shorting that when it became extreme that he now tries to ride bubbles up. What would have been the MAE for that trade under your system?

Well one thing is certain - the crazier the rise, the harder it falls.

Anonymous said...

Hussman has made a career out of being a bear. He was a bear in 1995-1999. He has been a bear for the past year. I think he's a smart guy. I also think he's wrong.

A rather simple buy and hold portfolio returned 50-70% in 2009. Almost zero capital gains. Zero transaction costs. Next to none in frictional costs.

I appreciate what active traders do in setting the bid and ask so I can passively invest. There's a reason pension funds and large endowments are getting out of active management. It doesn't work. You would think that after realizing that no technical analysis, no intuition, and no predictive tools of any sort a. predicted the recession and b. predicted the dramatic run since 3/09, that one would say, "hey, these tools are dogshit." The answer is not to double down. It's your money, you do want with it. But over the long run, it just doesn't work. Nobody has EVER been able to ascribe their success to anything but luck. The road to Dublin is littered with unemployed and broke speculative traders.