Investor Sentiment: Lack Of Conviction?

Investors remain bearish, and buying into last week's weakness continues to be the right play -- so far. However, a positive outcome is far from certain especially since there is an apparent lack of conviction amongst the "smart money". Nonetheless, this is our "fat pitch" especially since we have defined our downside risk and where a failed signal might occur. Despite these concerns this is a dynamic market environment with the potential for big gains.

The "Smart Money" indicator is shown in figure 1. 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 has turned more bearish.

Figure 1. "Smart Money"/weekly

Figure 2 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: "The lack of conviction we noted a week ago was still in effect this past week....When all the industries were put together the result was a modest buy bias, but one without a lot of investment dollars to back it up."

Figure 2. InsiderScore "Entire Market" Value/ weekly

The "Dumb Money" indicator (see figure 3) 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 bearish and this is a bullish signal. This is the first bullish signal since March 8, 2009.

Figure 3. "Dumb Money"/ 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 46.02%. Values less than 50% are associated with market bottoms.

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

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