Saturday, October 16, 2010

Investor Sentiment: What Hasn't Been Decided

The "dumb money" has become extremely bullish, and this is what one would expect when prices rise.  However, it is within the current extremes of bullish sentiment where the ascent of prices is likely to slow down.  I think this is a given over the next couple of weeks.  What hasn't been decided is whether this current move over the last 8 weeks - from the bottom of the range to the top - will develop into a full fledged trend move.  This will be characterized by the market continuing to rise despite the overbought and over bullish conditions.  The market is at or nearing that juncture where overbought becomes more overbought, and it is within such extremes of bullish sentiment where new bull markets are launched.

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. The "Dumb Money" indicator has turned extremely bullish. The current bounce has followed the expected script.

Figure 1. "Dumb Money"/ weekly

The "Smart Money" indicator is shown in figure 2. This is calculated utilizing data about SP100 options (or $OEX put call ratio), which is thought to represent large tradersThe "smart money" is neutral. Previously, the "smart money" calculations utilized data from the NYSE; this data is no longer publicly available.

Figure 2. "Smart Money"/ weekly

Figure 3 is a weekly chart of the S&P500 with the InsiderScore "entire market” value in the lower panel. From the InsiderScore weekly report: "Insider activity slowed dramatically as more trading windows closed ahead of Q3'10 (or comparable period) earnings announcements. There was, however, notable selling in the Energy and Consumer Discretionary sectors and some interesting buying scattered about the Industrial Goods and Consumer Staples sectors. Transaction volume will remain constrained until earnings season kicks into high gear and then we should see a flurry of activity and, we hope, some interesting signals heading into the end of the year."

Figure 3. InsiderScore "Entire Market" Value/ weekly

Figure 4 is a weekly chart of the S&P500. 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 53.97%. 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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