Sunday, May 8, 2011

Investor Sentiment: The Devil is in the Details

While the main indicators barely budged week over the week, components used to construct these indicators are starting to head towards extremes.

For example, 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

The "dumb money" indicator barely budged week over week; however, one of it's components, the Investor Intelligence data, is showing over three times as many bullish newsletter writers as bearish ones.  As we can see in figure 2, such extremes in bullishness (over the past 5 years) are more consistent with lower prices than higher ones.  The indicator in the lower panel looks at the ratio of bulls to bears; values greater than 3 are above the black horizontal line. 

Figure 2. SP500/ Investors Intelligence/ weekly

Figure 3 is a weekly chart of the SP500 with the InsiderScore "entire marketvalue in the lower panel.  From the InsiderScore weekly report we summarize: "The first big week of insider activity for Q2'11 brought little in the way of surprises as selling ramped up in the wake of the initial big wave of earnings announcements. Sellers outnumbered buyers 6-to-1 and there was little in the way of notable buying."  Although the current "entire market" value isn't extreme, I believe the devil is in the details on this as well.  With stocks at multi year highs and after a prolong period of share appreciation, insiders have "ramped up" their selling.  
Figure 3. InsiderScore "Entire Market" Value/ weekly

Figure 4 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 70.22%.  Values less than 50% are associated with market bottoms.  Values greater than 58% are associated with market tops.

Figure 4. Rydex Total Bull v. Total Bear/ weekly

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