Sunday, February 6, 2011

Investor Sentiment: The Superman Market

"Faster than a speeding bullet! More powerful than a locomotive! Able to leap tall buildings at a single bound!"

"Look! Up in the sky!"

"It's a bird!"

"It's a plane!"

"It's Superman!"
Yes, this market -like Superman of yore - is untouchable.  There is no use in saying this or that will happen until it does.  Overbought, over bullish, over valued, and non-confirming breadth have not mattered, and at this point, saying when these metrics will matter is an exercise in futility.  The market should correct sooner than later, but the operative word here is "should".  Markets usually do correct unless of course we are ushering in an era of new found prosperity courtesy of financial engineering.  And maybe we are!  I personally don't drink the "kool aid" and I remain cautious as I don't believe that "this time will be different".

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:   "A week after insider sentiment improved to its best level since the week ended August 31, 2010, insiders downshifted as the numerical gap between sellers and buyers widened. Volume picked up, but it will be another week or so before we see a flood of transactions, the result of two big weeks for earnings announcement being tied up."

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 69.56%, and this indicator has now turned down three consecutive weeks from its highest level in 10 years.  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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hettygreen said...

I wonder how many who sold eons ago at much lower prices have been persuaded it's now safe to get back in? The cynic in me says this latest stage of the slow melt up is beginning to bear fruit - I mean somebody besides the Government must be buying all those insiders' shares right?

Doeko said...

The more useful reaction to this would be, in my opinion "Funny, somebody other than the government and the retail crowd must be doing the selling".

Can't have only buyers, and the gains have not been that impressive recently. Insiders and whoever else may be selling...

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