Sunday, August 22, 2010

Investor Sentiment: Heading In The Right Direction

Insiders are buying, and the "dumb money" indicator is neutral but nearly becoming more bearish (i.e., bull signal). Another week of downside pressure will likely set up another buying opportunity in the near future as lower prices will bring out the bears. How sustainable will this buying opportunity be is the only question. In recent months, bearish extremes in investor sentiment have led to quick rallies (1-2 weeks) on lackluster volume that have been prone to fail. In other words, the markets aren't going anywhere fast, and the risk of failure is mounting.

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 four weeks in a row.

Figure 1. "Dumb Money"/ weekly

The "Smart Money" indicator is shown in figure 2. This is calculated utilizing data about SP100 options, which is thought to represent large traders. Previously, the "smart money" calculations utilized data from the NYSE; this data is no longer publicly available.

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: "Insider sentiment improved to its best level since the week ended March 24, 2009 as, week-over-week, the number of companies with buying increased dramatically and the number of companies with selling decreased solidly.... That sentiment is at its best level since March 2009 is certainly important, but it's also important to note that sentiment is around the same level it was on the downside of a huge buying burst, after the market had rallied 20% off its bottom."

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 53.93%. Values less than 50% are associated with market bottoms.

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

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