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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: "Buyers have come out in numbers (especially following the "flash crash"), but they're not putting enormous amounts of money to work; and, despite taking a couple off days off, sellers are still the dominant force when you eliminate the Financial sector from the equation."
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 57.89%. Values greater than 58% (arbitrarily chosen) are associated with market tops, and the red dots over the price bars indicate such. This time was NOT different.
Figure 4. Rydex Total Bull v. Total Bear/ weekly
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3 comments:
Is it May 27th yet?
My forecasters see the retail customer frightened and sitting on the sidelines-does 'neutral' mean they are done selling? The Funds are shown buying stocks at perceived lows. The smart money is moving their money out of Europe into US stocks, short term US bonds and the US dollar. Once Germans and Austrians stop buying gold at their local retailer, gold should retrace don't you think?
For those inflationists, like myself, the US stock market looks to be the 'bubble' of choice and once again I ask, "What are other inflationists looking to buy?"
If the smart money was so smart, why is it selling low and buying high? The longer term success is, get a pen out for this, buy low sell high.
After Europe has been taken to the wood shed, what kind of idiot is selling now at a significant discount to the peak? Oh, the same kind that uses trailing stops to "cap downside." How's that working on May 6th?
But the point is that this is the time to BUY Europe, not sell. The stronger dollar, mass panic, and significant declines in the MSCI EAFE mean "SALE."
Anon #2: It is always good to buy low and sell high. But I would argue that there are times when oversold becomes more oversold (i.e., trend lower) and the value of the distressed asset isn't recognized for months/ years - it is dead money.
If you are buying Europe now because you want to make 5% over the next month or so, I am sure there will be a bounce for you...you just have to time it right.
The smart money/ dumb money indicator is constructed on weekly data and implies an intermediate term time frame, and I know few want to believe it (because they are worried about the next 3% which is difficult to do all the time), the data really does show that it is best buy 'em when the "Dumb Money" is bearish.
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