Sunday, February 13, 2011

Investor Sentiment: Very Brutal

As expected, the bullish extremes in investor sentiment persist.  Company insiders continue to unload shares at a high rate.  As I have brought forth over the past couple of months, these data points (and those of most analysts) have not mattered as the major indices keep marching higher.  It has been very brutal if you are anticipating a correction.  It has been brutal if you are short, and it has been brutally hard to sit on your hands and do nothing while you wait for an entry point that is more than 1% below the recent highs.  At this point, divining when a meaningful correction will happen is only guess.

For the most part, the indicators have been flashing these kind of extremes since November, 2010.  The market did correct (slightly) prior to the initiation of asset purchases by the Federal Reserve.  Then from December through January, we got into the "this time is different" scenario  where the market goes higher despite the extremes in bullish sentiment.  That scenario ended a couple of weeks ago. At this point, price has become disconnected from the indicators.  In essence, it has become difficult to quantify the current price action with the data.

With this in mind, I still present this week's data....

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: "Sellers outnumbered buyers more than 4-to-1 as insider transaction volume increased significantly in the wake of the first major tranche of earnings announcements. While there was a 20% increase in the number of buyers, the number of sellers rose more than 100%, meaning that virtually all of the volume increase was the result of new (or return) sellers. None of this is surprising - sellers have been the dominant breed for twenty-three consecutive weeks, stretching back to the week ended September 7, 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 69.87%, 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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1 comment:

Denali92 said...

The price action is definitely unprecedented.

I watch the midcaps and they have had two daily cycle corrections in 6 months and they did not last longer than a week, which has NEVER occurred before!

We now seemed to have jumped some invisible barrier in February and it does look and feel like people are going to start chasing this market parabolically, as ALL sellers have been burned during the past 6 months...

It does not make sense to most people, but emotions are a big part of market moves and I have yet to discover an indicator that really highlights the emotional state of the market... for now, the unexpected move and the one that seems to cause the market the most pain is higher... so we just keep going higher... Yes, CRAZY... but until the market forgets about possible corrections, we may just keep going up!

All I can say to myself is UNBELIEVABLE and so FRUSTRATING!