Sunday, April 10, 2011

Investor Sentiment: Is It Time to Bet the Farm?

Investors continue to do what they do best: react to price changes.  Prices are up over the last 3 weeks and as expected, investors have become increasingly bullish.  Is it time to join the party and bet the farm?  Some investors seem to think so.  While it does take bulls to make a bull market, there is no indication at this point that this scenario will unfold.  For now, investor sentiment is neutral and not worthy of betting the farm.

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.   This indicator is neutral. 

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 we summarize: "There was little change week-over-week as insider sentiment remained in a Bearish Bias zone. Sellers outnumbered buyers more than 3-to-1 and have now been the dominant transactee every week since the beginning of September 2010 (31 weeks). No one sector stood out in terms of sentiment as activity was democratically dispersed. Transactional volume was seasonally light and will decrease further over the next few weeks as companies prepare to announce Q1'11 earnings."
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 65.58%.  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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Anonymous said...

Hello!!! You published "smart money" indicator. Where did he go???-:(

Guy M. Lerner said...


I took the "smart money" indicator out about 6 months ago because it really wasn't smart in any time period

See this link:

And this link:

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