Monday, October 4, 2010

Investor Sentiment: Neutral

For the past week, investor sentiment has turned neutral.  The short covering portion of this rally is over, and stocks will need to advance on their own merit.  With resistance looming overhead and stocks having advanced too far, too fast and on too little sponsorship, it seems reasonable that a pull back or consolidation is in order before any advance can be contemplated.

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 3 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: "Insider activity slowed dramatically as the final days of Q3'10 arrived and trading windows closed for executives and directors. There were still pockets of bearishness, most notably in the Financial and Energy sectors, but overall market sentiment was Neutral as our Weekly Score downshifted to within whispershot of its 52-week average. Activity will remain constrained for the next three to five weeks as companies prepare to and eventually report earnings."

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..31%. Values less than 50% are associated with market bottoms.
Figure 4. Rydex Total Bull v. Total Bear/ weekly

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