Investor Sentiment: Extremes Don't Matter, This Time is Different

Until proven otherwise, extremes in the sentiment indicators don't matter as "this time is different".  I never really believe that "this time is different", but that's what I have labeled those instances where prices lifted strongly despite the bullish extremes in sentiment.  The current rally has taken on a quality reminiscent of 1995, 1998/ 99, 2003 and 2009.  In these instances, it took bulls to make a bull market.  

I have pointed out how dysfunctional the price action has been, and it is becoming pointless to anticipate a market correction.  On the other hand, investing in a market that refuses to correct is problematic as well.  It is a higher wire act without a safety net.  It is my belief (guess?) that the correction will come sooner than most expect as market extremes with poor underpinnings (i.e, lagging market breadth) should correct (beyond a couple of percent), but as you know, the market doesn't care about what I think or do.  For now, we must operate under the assumption that "this time is different" until it isn't. 

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 is very bullish to an extreme degree. 

Figure 1. "Dumb Money"/ weekly

Figure 2 is a weekly chart of the SP500 with the InsiderScore "entire market” value in the lower panel.  From the InsiderScore weekly report: "Insider transaction volume was seasonally slow this past week as the vast majority of insiders are prohibited from trading until their respective companies report Q4'10 earnings. With this backdrop in mind; sellers outnumbered buyers 3-to-1 and were the dominant force for the nineteenth consecutive week, dating back to the first week of September 2010."

Figure 2. InsiderScore "Entire Market" Value/ weekly

Figure 3 is a weekly chart of the SP500. 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 69.82%, and this is the highest value in 10 years of data.  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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