Saturday, May 14, 2011

Investor Sentiment: The Market Lacks Umph!!

It is becoming clearer by the week that the rally that was ignited last August on the heels of QE2 is running out of gas.  If prices did move higher, it is possible that this could be construed as bullish as it does take bulls to make a bull market.  But being so late in the rally, it would seem that any potential gains would be just crumbs to the gains that have already been made. Furthermore, without a sell off to move investors and cash to the sidelines, it is hard to see a rally of any significance developing.  Call me a non-believer, but the market really needs to sell off and investors need to turn bearish (i.e., bull signal) before any real umph returns to this market.
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: " sentiment was still slightly in Sell Bias territory as, excluding Financials, sellers outnumbered buyers 3-to-1."
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 70.64%.  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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