Monday, November 8, 2010

Investor Sentiment: Closing in on Extremes in Bullishness

For the week ending November 5th, we find that the "dumb money" is extremely bullish, that insiders are increasing their selling, and that the Rydex market timers are nearing extremes in bullishness.  We are closing in on extremes in bullishness which should 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 extremely bullish for the fourth week in a row.  

Figure 1. "Dumb Money"/ weekly

Figure 2 is a weekly chart of the S&P500 with the InsiderScore "entire market” value in the lower panel. The value is almost below the lower trading suggesting an extreme selling bias amongst insiders.  From the InsiderScore weekly report: "The first big week of transaction volume for Q4'10 saw insiders showing a distinct sell bias. A good portion of the selling came courtesy of S&P 500 insiders who, bulls will be happy to know, are not nearly as predictive as their Russell 2000 counterparts. The latter group showed a slight sell bias, but their activity remained muted due to lock-ups ahead of earnings announcements."

Figure 2. InsiderScore "Entire Market" Value/ weekly

Figure 3 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 56.55%. Values less than 50% are associated with market bottoms.  Values greater than 58% are associated with market tops.
Figure 3. Rydex Total Bull v. Total Bear/ weekly

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