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Investor Sentiment: 4 Charts Are Now 1
As investor sentiment remains at the same extreme bullish levels as last week, I have decided to forgo the normal 4 charts that I show and consolidate them into a single chart complete with a composite indicator that measures all levels of investor sentiment. This should be another time saving moment for our readers.
See figure 1 a weekly chart of the S&P500 with the composite indicator in the lower panel. The indicator looks at investor sentiment from 2004 to the present.
Figure 1. Investor Sentiment Composite
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So what am I measuring? Normally we have 4 charts looking at:
1) the "Dumb Money" indicator; the "Dumb Money" indicator looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: a) Investor Intelligence; b) Market Vane; c) American Association of Individual Investors; and d) the put call ratio.
This week, the "Dumb Money" indicator remains very bullish to an extreme degree.
2) the "Smart Money" indicator; the "smart money" indicator is a composite of the following data: a) public to specialist short ratio; b) specialist short to total short ratio; 3) SP100 option traders.
This week, the "Smart Money" remains neutral.
3) the Rydex bullish and leveraged v. the Rydex bearish and leveraged assets.
This week, the Rydex bullish and leveraged traders outnumber their bearish and leveraged cohort by more than 2 to 1.
This week company insiders continue to sell in record numbers.
So our composite indicator requires 13 different types of data and encompasses multiple investor groups such as retail and professional investors and company insiders. The indicator is a very comprehensive look at market and investor sentiment.
As expected, investor sentiment shows a lot of bullish optimism (while company insiders are net sellers to an extreme degree), and this puts our indicator in the extreme optimism zone, which is a bearish signal.
So what does this mean? It will likely take several weeks for such bullish extremes to unwind. In essence, what I stated several weeks ago still stands: 1) the greatest gains are behind us; 2) the markets are to trade in a range with an upward bias; 3) there will be a bid under the market; 4) it will be tough to short or bet against this market for the foreseeable future.
That sounds like the current market as we come into the last week of Summer!
I'm a little curious to know - how are all the different pieces combined to form the composite? Is each source of data given equal weight?
Just a simple grading system. For example, if insiders are selling to an extreme then it got a score of -1; if they are buying to an extreme degree, then it got a score of +1; neutral=0.
I wouldn't get too hung up on the details; the idea of all this work is to show where we are on the playing field.
Does anyone know where I can get a 10M - 25M margin line and a top tier trading platform secured against 100M in fine art?
Become a bank and borrow at the discount window. Your 100 m dollar art collection is most likely the best asset that has been offered as collateral to the fed.
Does anyone know where I can get a 10M - 25M trading platform line secured against fine art worth 100M+?
call Sotheby's. Or Citi. Or JPM. All of them might give you as much as 50% margin.
Stop any programs that was built or touch by him and anything that looks suspicious I would close up in a heart beat.
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I think you have to be leary of overly bullish sentiment coming out of labor day. There have been three instances where the market has been more than 45% off its 52 week low headed into September: 1929, 1932, 1933, 1987. Of those four examples, the minimum correction during Sept-Nov period was 25%.
I think many of the insiders who are selling right now are going to regret it very, very much in the future. The cash they get will be worth nothing soon and the companies they bhave been building for their whole lives will end up in the hands of vampire bankers throwing taxpayer money around while it lasts.
There's nothing wrong with selling now and buying back later at less than half the price. In fact, depending on the company, you may be able to buy back at much less than half. Not selling now and diversifying is stupid.
Your statement is a contradiction.
So what about the "bear" signal end of 2006? And the bullish signal before the great plunge in 2008... I have difficulties to relate the readings of the indicator to the actual moves of the market.
Not every signal results in some sort of reversal that works with laser like precision ---that is called the "holy grail". And we don't have that here. All I am showing is multiple measures of investor sentiment combined together; it works most of the time in that it is a good place to look for reversals and failures to reverse -otherwise I wouldn't waste my time showing it!
Any idea when the signal confirms a trend or indicates a reversal?
Actually, given the current market distortions by liquidity provision through the Fed, I doubt investors understand the dynamics of stock price development. Investors are better at understanding the dynamics of change in earnings than of change in liquidity.