Sunday, September 13, 2009

Investor Sentiment: Bullish Fodder

The "It Takes Bulls To Make A Bull Market" scenario is playing out, and the best thing to do is not fight the tape. However, someone forgot to tell the Rydex market timers who continue to look for a top and short the market. For the last two months, they have become short covering fodder for the bulls.

The "Dumb Money" indicator is shown in figure 1. The "Dumb Money" indicator looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investor Intelligence; 2) Market Vane; 3) American Association of Individual Investors; and 4) the put call ratio. The "dumb money" remains extremely bullish.

Figure 1. "Dumb Money" Indicator/ weekly

The "Smart Money" indicator is shown in figure 2. The "smart money" indicator is a composite of the following data: 1) public to specialist short ratio; 2) specialist short to total short ratio; 3) SP100 option traders. The "smart money" is neutral.

Figure 2. "Smart Money" Indicator/ weekly

Company insiders selling their shares to a less extreme degree. See figure 3, a weekly chart of the S&P500 with the Insider Score "entire market" value in the lower panel.

Figure 3. InsiderScore Entire Market/ weekly

Figure 4 is a daily chart of the S&P500 with the amount of assets in the Rydex bullish and leveraged funds versus the amount of assets in the leveraged and bearish funds. Not only do we get to see what direction these market timers think the market will go, but we also get to see how much conviction (i.e., leverage) they have in their beliefs. Typically, we want to bet against the Rydex market timer even though they only represent a small sample of the overall market. As of Friday's close, the assets in the bearish and leveraged funds were greater than the bullish and leveraged; referring to figure 4, this would put the red line greater than green line.

Figure 4. Rydex Bullish and Leveraged v. Bearish and Leveraged/ daily

There is no question that since July 8, 2009 the equity markets have been on a moon shoot. Over those 46 trading days the S&P500 has gained 18.1%- that's over a 100% annualized. Bulls have thrown caution to the wind, and it is paying off for now. The market in its all knowing, all seeing ways is forecasting better times ahead. It is obvious that the bears cannot see this or they just don't get it. But as a trader or an investor, you a have a choice of where, when and how you want to play. Even with the Fed punch bowl over flowing, the equity trade is getting pretty crowded. Treasury bond ETF's are looking rather appealing. I still think the best course of action is not to fight the tape, and of course, don't become fodder for the bulls.

Over the past 5 weeks, I have been stating that the equity markets will trade in a range with an upward bias; shorting the market for more than the quick flip has become a difficult proposition. This has turned out to be a good "call" as it is all bulls all the time. It is just going to take time for the extreme bullish sentiment to unwind.


rigger said...

have to say that I'm sitting this one out and have been for some time.The fundamentals are terrible but they are a longer term consideration.These days it seems momo is everything.

Anonymous said...

Guy..I get that there are lots of bulls in a bull market, but there's nothing to trade off of with your dumb money indicator. It's been stuck in uber bullish for at least half of this year with no hint when the trend will end (which it will eventually). Maybe subtract the leveraged bulls-bears from your dumb money indicator to get something more useful.

Anonymous said...

bond ETFs like TLT? or bond ETF's like TBT?

Guy M. Lerner said...

I stated in these articles what my thoughts on Treasury bonds/ yields are:



I discussed a sell signal in Treasury yields on August 26!!!
Why Treasury Yields Are Going Lower

This is why I don't do a subscription service; you got to do some work on your own!!!!

Anonymous said...


the extreme bullishness of the dumb money indicator is similar to what happened in spring 2003 when the market climbed from the deep bottom. Note that after that, the dumb money indicator dropped to 'moderately bullish' levels, which caused a 2 - 3 month plateau in S&P 500 in June - August 2003. The indicator remained moderately bullish, which propelled the index up another 15 % in the next 6 months.

My guess is that we have now entered a phase similar to June - August 2003. The dumb money indicator will fall to moderately bullish levels. Stock indexes will plateau for a few months. What happens after that, depends on how bullish the dumb money index stays.