As I have been alluding to over the past couple of weeks, anticipating a correction (beyond 1% from the near term highs) in the equity markets has been very brutal. This market has made road kill of a lot of analysts and indicators. With that being said, this week's sentiment update not only has the "dumb money" being bullish (as expected) but company insiders (the "smart money") have increased their selling significantly. This is the third time since November, 2010 (when the Fed started asset purchases) that these three indicators have been aligned in such a manner. Will the third time be the charm leading to a correction and a better risk adjusted buying opportunity?
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
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 70.66%, and this indicator is at its highest level 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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