Investor Sentiment: Bulls and Bears Need to Make Their Case

Referring to a close below support levels, I stated the following last week: "There is always hope that the failed signal will just be a fake out. It has happened in the past, and such fake outs have led to very strong upward moves. This scenario seems less likely." Well here we are one week later and the "less likely" occurred as the S&P Depository Receipts (symbol: SPY) closed back above old support or resistance levels at 107.58. Of course, this reversal was on shrinking volume. However, leave it to the markets to do their best to frustrate the most. Investors continue to be bearish despite last week's romp higher. Both bulls and bears need to step up and make their case. The bulls need to prove that last week's low volume reversal was more than a "dead cat" bounce, and the bears need to show they can re-ignite the selling that gripped the markets for the last two months. Sentiment favors the bulls as the ranks of the bears continue to grow. In particular, two consecutive weeks of bearish sentiment is the sweet spot. Furthermore, reversals of failed signals can be particularly bullish. On the SPY, a second weekly close above 107.58 should be a positive; a close below 102.02 is a negative.

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 now bearish for two weeks in a row.

Figure 1. "Dumb Money"/ 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. As of this past Friday, the "Smart Money" indicator is bullish/neutral.

Figure 2. "Smart Money"/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: as with last week, buying and selling slowed considerably due to the quarter ending and the holiday shortened week; insiders remained without conviction.

Figure 3. InsiderScore "Entire Market" Value/ 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 44.06%. Values less than 50% are associated with market bottoms. This is the lowest value since July, 2009.

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

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