Saturday, May 22, 2010

Investor Sentiment: It Would Be Better If...

It would be better if prices on all of the major indices: 1) decisively broke their 200 day moving averages; 2) closed below weekly support levels; and 3) closed below the February, 2010 lows. It would be better if the prior week's pullback, which morphed into this week's "correction", actually caused investors to utter the "b" word -- as in bear market. It would be better if investors had their spirit's broken as investor sentiment actually turned bearish (i.e., bull signal). But none of this happened, and what seemed scary last week really wasn't enough in my opinion to produce a lasting and meaningful bottom. So if prices go higher from here, we will have the same old story of a market: 1) that went down for a week or two; 2) that got everyone worried ~ “oh my god, a 10% correction” from ridiculously overbought levels I might add; 3) that will be bid back up rather strongly; 4) that will make investors forget about the prior week; 5) that will be sold rather abruptly again. This kind of price action, I am convinced, is consistent with distribution and a market top. The best market bottoms occur when investors turn bearish, and this has yet to happen.

The "Dumb Money" indicator (see 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: "...

selling intensified in almost every sector and industry. If there's a silver lining it's that we did see a number of actionable buys last week. Of course, they were outnumbered by the actionable sells and only the Basic Materials was able to squeeze out anything resembling positive sentiment."

Figure 3. InsiderScore/ weekly "entire market" value

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 51.68%. Values less than 50% are associated with market bottoms.

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

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Anonymous said...

i agree, put another way, i dont believe we've had a (the) crash, yet

Sammy Iyer said...

May be short term bottom coming this week?.$VIX,$TICK,$NYSI,$NAMO,$SPXA50,$TRIN,$NDXA50,$OEXA50,$BPENER,$BPSPX|B|F

Guy M. Lerner said...

Maybe short term bottom? Possibly yet that is my point: a short term bottom won't be good for the longer term picture -- it will be the same old thing

hettygreen said...

What if the third stage of rule #8 of Bob Farrell's Ten Rules for Investing is getting underway? A major decline in slow motion (seen in hindsight x number of years from now) with bullish sentiment remaining inordinately high all the way down. In x years time the major indexes will all look like the DJIA chart from May 1930 to June 1932 (or the Nikkei from 1989 to now) and the dip buyers, bears without conviction and (bull)frogs will all have been boiled alive. Few if any investors will have made (or rather not lost) any money and most will have eschewed equity investment forever.

D-man said...

"a short term bottom won't be good for the longer term picture -- it will be the same old thing"

Maybe, but what's even more important than longer term picture is Goldman's bonuses; isn't everyone on the Hill spending their energy to help these people make fat bonuses? Hey, what do you guys are talking here? :)


With that rule, I'm with you; but I want to say to these "smart" investors out there thinking they can "guess" tomorrow's events: is as you wish guys, I'm waiting for you. I'm hedged and I plane to stay like that for the coming years (that doesn't mean I can't suffer losses). That's why I like Guy's blog: it's STRATEGICAL.

Mike C said...

It would be better if prices on all of the major indices: 1) decisively broke their 200 day moving averages; 2) closed below weekly support levels; and 3) closed below the February, 2010 lows.

I'm not following you here...I guess because I'm not sure what you mean by "better". By better do you mean bullish or bearish.

In terms of the 3 items you list above, would you not view those (I would) as indicating a probable reversal of the intermediate-term trend from cyclical bull to cyclical bear and the likely end of what has been a 14 month uptrend.

I guess in my view from the perspective of "long-term health" of the market I think it would be good to get down to much lower levels...850ish to 950ish...where long-term investors could accumulate good long-term values.

Not sure of the point of wishing for condition A or condition B or condition C...right...I mean just trade the chart as it is.

If we break the Feb lows, where do you see the next major technical support zone.

Guy M. Lerner said...

Mike C:

I agree trade the charts; I will also throw in that the best bottoms occur when sentiment is bearish (i.e., bull signal); see the article I link to in this article

Yes, it would be best if we broke some key levels and got people to worry even more so that would be more bullish in my opinion. I have not changed my opinion on this for some time and in fact, it would be good if prices went lower and sentiment became more bearish (i.e., bull signal); I have also stated since the beginning of the year that it would be important to buy low and sell high as we were likely in a range...look for my forecast on the SP500 earlier in the year.....lastly if sentiment does turn bearish (ie bull signal) and prices fail to bounce here, it is very likely that we are going lower --much lower