Friday, May 7, 2010

This Is For All You Bull Market Geniuses

This article is for all those bull market geniuses, who buy the hype and who have been fooled into believing, yet again, that "this time is different".

Figure 1 is the "Dumb Money" indicator. This is the same indicator I show every weekend in our report on investor sentiment; the indicator will be updated this weekend. 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.

Figure 1. "Dumb Money" indicator/ weekly

Since March, 2009, the "Dumb Money" indicator has been bullish to an extreme degree on 3 separate occasions, and typically, these are bearish signals suggesting 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. In figure 1, this would be when the indicator is red in color.

For months on end, I have heard from those investors (i.e., bull market geniuses) who categorically and emphatically stated that this stuff doesn't work anymore. Of course, none of these bull market geniuses knew what was working either or bothered to offer alternatives or insight. But suffice it to say, a bull market covers up a lot of bad analysis.

Anyway, because I deal in numbers and those bull market geniuses don't, I thought we would look at the 3 instances since March, 2009 where the "Dumb Money" indicator was extremely bullish (i.e., bear signal) and see how things turned out.

The first time the "Dumb Money" indicator was in the extreme zone showing too many bulls was on May 8, 2009. This lasted until July 10, 2009. The return for the S&P500 over that period was a NEGATIVE 5.39%. The second instance was from July 31, 2009 to February 2, 2010. During this 29 weeks of bull market hype and other nonsense, the S&P500 gained a POSITIVE 8.91%. The last instance started on March 12, 2010 and the indicator still remains in the extreme bullish zone. As of Friday morning, that signal has returned a NEGATIVE 3.5%.

So let's assume that as a bull market genius, who bought the hype, you are so smart that you bought and sold the S&P500 only during those times when the indicator was in the extreme bullish zone (i.e., bear signal). In other words over the last 14 months, you were only long the market when the indicator in figure 1 was red in color. Now let's do a little math and add up the returns over those 3 periods, and we get a total return of 0%. Nada, nothing, zip!!

Since the March, 2009 lows, 61 weeks of time have passed. The 3 periods highlighted above in our little study account for 48 weeks of that time. The gains from March 13, 2009 to the present (Friday morning) are about 48%. The 48 weeks where investor sentiment was extremely bullish as determined by the "Dumb Money" indicator did not contribute at all to those gains - nothing.

So for all you bull market geniuses out there, you have earned exactly what you deserve --nothing!
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D-man said...


I'm waiting for an update of the SDS vehicle if you please to do it. The week didn't end yet and we saw these red days many times closing green; but maybe, just maybe, we get a reversal confirmation based on pivot points for SDS.

thanks in advance!

Fu Manchu said...

The bulls keep trying to turn it around today. What's your view on a day in the green, Guy? Will this bring back more bulls on Monday to build on the gain or sucker them in for another big decline?

Anonymous said...

Maybe the ongoing Financial Crisis 2.0 finally brings the 'dumb money' indicator to the bearish region again?

I think that currently there are two big opposing things that can influence the market sentiment:

1) People are tired of thinking about the recession, and economic growth has started again: this lifts the sentiment.


2) The US federal government and most European states are on the same road as Greece: a default will happen sooner or later unless there is a strict austerity program that includes tax hikes and spending cuts.

I believe that within 4 years, 2) will win: there will be a serious global recession and the consequent depression in the market sentiment. But in short term, people want to forget about 2). Thus, this year, the sentiment will stay elevated most of the time.


hettygreen said...

Nice vindication of your analysis Guy. A little horn blowing is certainly not out of order. Now if the bullish sentiment is still registering extreme doesn't this increase the likelihood of more downside? All I see in the action today (so far) is the same old tired equation of rising price + falling volume = (imho) wrong price.

Anonymous said...

I suspect all those black boxes of volitility will be reset no later than Tuesday to once again take monies from traders with stops to tight. Therefore, SDS could be in jeopardy early this week when the oversold condition gets rectified during the reset. The only genius one needs is to be aware that if this market does tank, which I doubt, those you call dumb money will pull their stable funds from the likes of Vanguard never to return. Are you aware that VG has offered their dumb money cheap brokerage accounts? If such investors wanted brokerage accounts, they would have left some time ago rather than rely on money managers.

Anonymous said...

I think some humility is in order. You have people commenting like this,

"Nice vindication of your analysis Guy. A little horn blowing is certainly not out of order."

Uh, you have been totally off the mark for the last 6-8 months so it only makes sense that even by chance alone you'd be correct.

Fu Manchu said...

Someone lost money today and is pissed! Ahem.

Guy M. Lerner said...

This is in response to the comments made by the last anonymous person on the list

you said off the mark for the last 6-8 months...I am not so sure about that but you are entitled to that opinion; for example, was anyone telling you to sell in November prior to the the 4 months range and drop into January? No. I rest my case.

I think the point that should be clear from the article is this: the indicator hits extremes of bullishness and usually this coincides with CNBC saying it is time to dip a toe in the know, stocks are safe to buy; this is also the time I get emails from dumby heads saying that I am an idiot; once again you can have an opinion but put some facts to that bias

I suspect that typifies the behavior of most investors -buying a sure thing, buying the breakout

Whether you want to call it vindication or not, the point is that it is always better to buy low than high (obvious) and buy when others aren't; the sentiment data clearly showed this even during the historic run of the past 61 weeks; the market gained 0% for those 48 weeks that the dumb money indicator was in the extreme bullish zone