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Investor Sentiment: Are We There Yet?

thetechnicaltake's picture


Like those long distance car trips I take with my children where 90 minutes into an 8 hour drive they say, "Are we there yet?", market participants are wondering the same: are we there yet? Will the recent bout of selling entice the buyers such that the market will revisit the highs last seen only 4 short weeks ago? Anything can happen, but from a sentiment perspective, the answer remains the same as last week: complacency reigns and this is not a high reward, low risk investing environment.

The "Dumb Money" indicator, which is shown in figure 1, 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" indicator shows that investors remain 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 indicator is neutral to bearish.

Figure 2. "Smart Money" Indicator/ weekly
Figure 3 is a weekly chart of the S&P500 with the InsiderScore "entire market" value in the lower panel. Insider trading volumes remain light although selling continues to out pace buying.

Figure 3. InsiderScore Entire Market/ 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 indicator is red having peaked (with the market) above 58%. In other words at the market peak 4 weeks ago, greater than 58% of the assets were in bullish funds (leveraged and non leveraged) relative to all of the equity funds. There is nothing magical about the number 58%, but intermediate term swings in the past 10 years have been identified when this indicator exceeded the 58% mark. These extremes in the indicator are noted by the red dots on the price chart and the maroon colored vertical lines.

Figure 4. Rydex Total Bull v. Total Bear/ daily


Although the selling has been intense, the measures of investor sentiment have yet to show any real bearishness or fear, which would be a bull signal. Although feasible, I would doubt that the next best time to buy would occur without at least one measure of investor sentiment turning bearish (i.e, bull signal). Even during the great rally of 2009, the "dumb money" only became bullish after a 32% gain in the S&P500 from the March low. Furthermore, the almost 20% rally in the S&P500, which occurred in July and August, was courtesy of short covering as investors - typified by the Rydex timers - where betting against that rally too.

The "dumb money" remains complacent, and the "smart money" and company insiders continue their indifference. Nothing has changed from last week, last month, or even 4 months ago when the market was higher than it is now!! For those keeping score at home, the S&P500 closed at 1068.30 on September 18; Friday's close - courtesy of last hour buying mind you - was 1066.19. Once again, the sentiment indicators still suggest that better buying opportunities lie ahead.

Are we there yet? No!


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Mon, 02/08/2010 - 10:34 | Link to Comment godfader
godfader's picture

How would these sentiment stats that Lerner is using have looked in 1991/92 or 94/95 or 98/99? Looking at just the last few years may be misleading.

Mon, 02/08/2010 - 16:02 | Link to Comment thetechnicaltake
thetechnicaltake's picture

I have plenty of links at thetechnicaltake blog....just use the search feature and type in "investor sentiment".


Start with this link.

Mon, 02/08/2010 - 14:33 | Link to Comment Anonymous
Mon, 02/08/2010 - 10:16 | Link to Comment Anonymous
Mon, 02/08/2010 - 10:16 | Link to Comment Anonymous
Mon, 02/08/2010 - 10:09 | Link to Comment Anonymous
Mon, 02/08/2010 - 05:56 | Link to Comment Anonymous
Mon, 02/08/2010 - 01:41 | Link to Comment Bear
Bear's picture

Investors will always remain bullish until they become bearish

Mon, 02/08/2010 - 16:18 | Link to Comment RSDallas
RSDallas's picture

Well spoken old wise one.

Mon, 02/08/2010 - 01:25 | Link to Comment JR
JR's picture


No Job Growth for Small Business Spurs Recovery Doubt

Feb. 8 (Bloomberg) -- Small businesses are becoming the Achilles heel of the U.S. recovery by limiting growth and job creation.

Companies with fewer than 500 employees, such as Phoenix Technologies Ltd, and Sonic Corp, helped lead the economy out of the four recessions since 1980. This time, they continue to cut capital spending and dismiss workers, eliminating 3,000 jobs in January, according to Roseland, New Jersey-based Automatic Data Processing Inc., the world’s largest payroll processor.

Improvement in the unemployment rate, which fell to 9.7 in January from 10 percent in December, may stall later this year if these firms aren’t hiring, and growth likely won’t meet the median 2.7 percent annual rate forecast for 2010 by 67 economists in a Jan. 14 Bloomberg News survey.

“Will you have a sustainable recovery a few years down the road without getting some small-business spending? No,” Cary Leahey, senior managing director at Decision Economics Inc. in New York and a former White House economist, said in an interview. “Wall Street gets it.” …

The National Federation of Independent Business’s index of small-business optimism has been near historic lows for 15 consecutive months, declining to 88 in December from 88.3 in November, the federation reported Jan. 12. During the four prior recessions, it dipped below 90 only once…

Because few economic reports capture small-business statistics, some economists say investors are being misled about the strength of recovery from the longest, deepest recession since the Great Depression.

Recent numbers suggest “the official data are too heavily weighted towards bigger companies, which are doing better than credit-constrained smaller firms,” said Ian Sheperdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York. “The latter employ half the workforce.” …

The nation’s monthly payroll figures are inflated because the Labor Department model that estimates small-business hiring has overstated the number of jobs added during the recession, Shepherdson says.

According to the model, small companies created an average of 113,000 jobs a month from February through December -- a period when total employment fell by a nonseasonally adjusted 3.7 million, Labor Department statistics show.

The model “is creating jobs out of thin air that are not actually being generated,” Joshua Shapiro, chief U.S. economist at MFR Inc., an economic-consulting firm in New York, said in a Feb. 4 note to clients…

Mon, 02/08/2010 - 14:32 | Link to Comment Anonymous
Mon, 02/08/2010 - 00:09 | Link to Comment Chopshop
Chopshop's picture

if 'you' lack 'sufficient' methodologies, then yes, "the sentiment indicators are bullish".  if you have 'sufficient' methodologies & appropriate experience, then no, the "sentiment indicators" are not bullish.  rather, they are extremely bearish.  they are off-the-f'ing-charts bearish.  they are screaming bloody murder to any passer-by.  i, for one, am indeed heeding their import, which is anything but bullish.

if 'you' must 'use' "sentiment indicators" then at least employ the DSI and COT etc., instead of consumer confidence-type eh, lagging, coincidental and wholly non-quantifiably robust, first derivative measures of segmented confidence. 

where does mr. mkt currently stand ?  on the ledge; at the precipice of jumping out a window to his death ... hence, classic wave 2 (triple zigzag) behavior within social mood and 'everyone's' read on 'the new bull' (hah). 

in a few months those proclaiming bull / buy today will be bloody, beaten and a whole lot less bold in their proclamations.  while of little to no use to traders, sentiment indicators are extremely valuable to investors of all stripes and are just about the only thing that can help shed light on uber-pivotal junctures (such as where global mkts collectively stand today ... on the precipice, about to follow wayne's words out the window.

Mon, 02/08/2010 - 01:14 | Link to Comment thetechnicaltake
thetechnicaltake's picture

Chop: I don't know what DSI is but COT is very erratic

Once again, I have presented 4 different looks at investor sentiment; not one is indicator is giving a bull signal



Sun, 02/07/2010 - 22:24 | Link to Comment Windemup
Windemup's picture

10 Start

20 lprint "Are We There Yet?"

30 goto 20

40 end


Mon, 02/08/2010 - 12:14 | Link to Comment Windemup
Windemup's picture

Yea, but you gotta love the sound it makes when it comes in over your AM radio.

Sun, 02/07/2010 - 23:20 | Link to Comment Anonymous
Sun, 02/07/2010 - 19:56 | Link to Comment Anonymous
Sun, 02/07/2010 - 20:51 | Link to Comment Anonymous
Sun, 02/07/2010 - 22:08 | Link to Comment Anonymous
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