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Investor Sentiment: Bullish Fodder

thetechnicaltake's picture




 

The "It Takes Bulls To Make A Bull Marketscenario 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
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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
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Company insiders selling their shares to a less extreme degree. See figure 3, a weekly chart of the S&P500 with the InsiderScore "entire market" value in the lower panel.

Figure 3. InsiderScore Entire Market/ weekly
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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
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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.

 

 

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Mon, 09/14/2009 - 07:55 | 68562 thetechnicaltake
thetechnicaltake's picture

Not to take offense at anyone but the "Dumb Money" is anyone typically and habitually on the wrong side of the market.  

Mon, 09/14/2009 - 06:19 | 68540 Anonymous
Anonymous's picture

THIS IMPLIES THAT THE DIRECTION OF THE EQUITY MARKET IS A CLOSED SYSTEM....WHAT IF AN EXOGENOUS SHOCK (SUCH AS THE USD RALLYING) IMPACTS THE STOCK MARKET ?

Mon, 09/14/2009 - 02:35 | 68517 Rob Lee
Rob Lee's picture

Hi, could you explain "dumb money" in more detail for me please?

Mon, 09/14/2009 - 08:17 | 68569 Marshal Ney
Marshal Ney's picture

This isn't a particularly concrete answer to your question, but Buffett, in a Socratic mood, wrote that when dumb money realizes it's dumb it ceases to be dumb.

Mon, 09/14/2009 - 02:19 | 68513 Anonymous
Anonymous's picture

dolar weakness is a shell game. look for market to self-correct soon.

Sun, 09/13/2009 - 22:18 | 68413 thetechnicaltake
thetechnicaltake's picture

Double thanks; I try hard!

Mon, 09/14/2009 - 07:46 | 68559 Marshal Ney
Marshal Ney's picture

Appreciate your straightforward approach. The unspoken message for many weeks, at least for me: patience.

Sun, 09/13/2009 - 22:13 | 68410 jwthomps
jwthomps's picture

Thanks for the grerat work.

Sun, 09/13/2009 - 20:56 | 68377 monopoly
monopoly's picture

Great charts. Just beyond words what is going on and at some point bulls will be foder for us bears. But for now I am cash, long and gold.

I trade what I see.

Well done

Sun, 09/13/2009 - 20:07 | 68353 Anonymous
Anonymous's picture

Would you mind explaining how these indicators are weighted? It's kind of obvious that the dumb money would be bullish (check CNBC) but I'm just curious as to how the different components affect the indicator's results.

Sun, 09/13/2009 - 23:40 | 68442 Anonymous
Anonymous's picture

This might help:

http://www.dailymarkets.com/author/guylerner/page/3/

It a link to the posts of the prognosticator set back to June. His most recent post on page 1 answers your question.

As just an opinion as I am not familiar with the site, it seems pretty convient that months of the weekly charts and calls that smart money was intellectually superior to dumb money in a totally random event scenario have been removed in favor of this week's.

After all, they gave Bill Cosby an honorary Phd and now he insists on being referred to as Dr. Cosby, and not facetiously.

Mon, 09/14/2009 - 14:03 | 68887 Anonymous
Anonymous's picture

Bill Cosby has an earned doctorate, albeit an Ed.D.,
from U of Mass. Wrote a dissertation and everything.

Now, if you want to argue about whether an Ed.D.
anywhere is hard to obtain, that's a different issue.

Do NOT follow this link or you will be banned from the site!