Saturday, November 27, 2010

Investor Sentiment: Smells Like A Top

It was only 2 weeks ago that the "dumb money" indicator and Rydex market timers were bullish to an extreme degree and company insiders were selling shares at a clip that had not been seen in 4 years.  In most instances, these are bearish signals.  The exception would be the scenario where too many bulls actually leads to a bull market.  This is what happened in 1995, 1998/ 1999, 2003 and 2009.  Will this scenario be repeated in 2010?  It is seeming less and less likely, and if this is the case, then it is worth repeating what I have stated for 3 weeks in a row: "If the market hasn't topped out already, it should do so within a couple of percent of the recent highs.  Rallies should be sold and stops tightened up.  The market is prone to sudden sell offs.  There will be better risk adjusted opportunities to buy in the future."

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 in neutral territory ever so slightly.

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.  From the InsiderScore weekly report: "Insiders across the market continue to sell at an impressive clip, however it's clear that the activity peaked during the week ended November 9th."
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 58.33%. 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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