Sunday, January 23, 2011

What A Difference A Week Makes

Two weeks ago, the extremes in sentiment did little to deter investors from chasing prices higher.  This is the "this time is different" scenario where prices move higher despite the increasing number of bulls.  At the start of last week, this scenario seem highly likely, and for the bears, it was best to get out of the way of such an advance.  But over the past week, the "this time is different" seems less likely to play out, and an intermediate term market top is likely to be upon us.  Oh, what a difference a week makes.  

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 marketvalue in the lower panel.  From the InsiderScore weekly report: "Insider trading volume remained low, so low in fact that the number of buyers was the lowest on the record since we began real-time monitoring of insider activity seven years ago. While the latter fact makes a good headline, the lack of buying is not surprising or concerning - yet. Insider action is seasonally slow due to pre-earnings announcement lock-ups and the market week was shortened by a holiday, further limiting insider trading action."
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 69.67%, and this value is less than the prior week, which was 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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