Monday, June 14, 2010

Beating A Dead Horse!

This is like beating a dead horse, but I thought I would trot out our composite sentiment indicator constructed from 13 different pieces of data.

This composite indicator is constructed from the 4 indicators that I typically show in the weekly round up on market sentiment. As expected, the indicator is giving a bullish signal as the "dumb money" is bearish and the "smart money" is bullish to neutral.

Several caveats are in order. First, the indicator starts in late 2004, which really isn't sufficient market time to understand how the indicator would function across different market environments. Regardless, this is what we have. Second, there are signal failures, and understanding the significance of these failures (i.e., generally bearish price action) is just as important as a positive outcome. In essence, there is a lot of information contained in this indicator.

The figures below are weekly charts of the S&P500 from 2004 to the present. The maroon colored vertical bars highlight those times when the indicator turned bullish.

Figure 1. Composite Indicator/ 2008 to present

Figure 2. Composite Indicator/ 2006 to 2008

Figure 3. Composite Indicator/ 2004 to 2006

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