Monday, December 1, 2008

Market Sentiment

The Investor Sentiment Composite Indicator has been bearish for two weeks running, and this is a bullish signal. Back testing shows that this is the optimal window for buying. See figure 1, a weekly chart of the S&P500, for the indicator.

Figure 1. Investor Sentiment Composite

While the Investor Sentiment Composite Indicator (or "dumb money") shows too many bears, the Smart Money Indicator (see figure 2) has yet to turn bullish. In fact, the "smart money" remains bearish. In 18 years of data and in over 45 signals, the Smart Money has confirmed the Investor Sentiment Composite Indicator in over 95% of the cases. By this I mean, we need to see the "smart money" turn bullish as a confirmation of the “dumb money” turning bearish. Typically, lower prices will make the “smart money” turn bullish.

Figure 2. Smart Money

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