Sunday, October 10, 2010

Investor Sentiment: Neutral Redux

Investor sentiment is neutral across the slate of indicators for the second week running.  While the trend remains up, the best - most accelerated - gains are likely behind us.  Higher prices will bring out more bulls, which will be a bearish signal.

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) Investors Intelligence; 2) Market Vane; 3) American Association of Individual Investors; and 4) the put call ratio. The "Dumb Money" indicator remains neutral for 4 weeks after 3 weeks of showing excessive bearish sentiment (i.e., bull signal).  The current bounce has followed the expected script.

Figure 1. "Dumb Money"/ weekly

The "Smart Money" indicator is shown in figure 2. This is calculated utilizing data about SP100 options (or $OEX put call ratio), which is thought to represent large traders.  The "smart money" is neutral. 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: "Our Weekly Score for the Market Excluding Financials fell to its worst level since the week ended May 18, 2010 as companies with selling outnumbered companies with buying by a 2.65-to-1 ratio. That doesn't mean that Financials were strong - the sector was one of the weakest. The selling came at smallcaps and in the Russell 2000, where the Weekly Score also fell to its worst level since the week ended May 18, 2010. The buying, meanwhile, came from nowhere, as insiders who weren't locked-up due to upcoming earnings announcement thought it best to sit on the sidelines or take money off the table."

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 52.51%. Values less than 50% are associated with market bottoms.
Figure 4. Rydex Total Bull v. Total Bear/ weekly

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