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Investor Sentiment: Changes Within The Indicators
Every week that I put together these comments, I pay great attention to the words that I write. Last week's key points were: 1) the range continues; 2) seasonal tendencies and being at the bottom of a well defined trend channel argue for a bounce; 3) we need to see the excesses of bullish sentiment unwound before we have meaningfully higher prices; 4) the risk of a market down draft remains great. This week investor sentiment has become very convoluted suggesting even greater care in the words I choose. So let's get to it.
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 are extremely bullish.
Figure 1. "Dumb Money" Indicator/ weekly
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With regards to the "Dumb Money" indicator there is no change. Investors remain bullish to an extreme. This implies a trading range with an upward bias until the excesses of bullish sentiment are unwound. However, the American Association of Individual Investors data, which is one of the components of the "Dumb Money" indicator, has turned decidedly negative on the market, and typically, this bearish stance is a bullish signal. In fact, as we can see in figure 2, their bearishness is at levels seen just prior to the market's lift off in July of this year.
Figure 2. AAII/ weekly
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The "Smart Money" indicator is shown in figure 3. 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. There is no change in the "Smart Money" indicator.
Figure 3. "Smart Money" Indicator/ weekly
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Figure 4 is a weekly chart of the S&P500 with the InsiderScore "entire market" value in the lower panel. What we notice is that the value is moving above the upper trading band. Moves above this level are considered bullish, and in fact, this is the highest level of insider buying in about 6 months. However, buying wasn't broad based or significant, and outside of the financial sector, "there was only a modest deviation in sentiment week-over-week towards a less bearish stance." In other words, "bullish signals weren't backed up by actual transactions."
Figure 4. InsiderScore Entire Market/ weekly
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Figure 5 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 5, this would put the red line greater than green line.
Figure 5. Rydex Money Market/ daily
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However, when we look at the entire Rydex data more closely, we note that the amount of assets in the Rydex Money Market Fund remains very low and this is a sign of greed. Typically, when the Rydex market timers move to a bearish and leveraged position as they are now, we see money coming out of the market (or moving to the sidelines) to the safety of the money market fund. We don't have that now. The Rydex market timers appear to be both bearish and bullish, which is quite unusual.
So where do we stand? I don't like to massage the data nor rationalize the signals given by the indicators, and I won't do that here. The sum of the data would suggest that the words that I have been stating for the past 4 weeks still apply:
"Equities are for renting not owning
at this juncture. I
am not calling for a market top, but prices should trade more in a range, and
if you intend to play on the long side, it will be important to maintain your
discipline (for risk reasons) and buy at the lows of that trading range and
sell at the highs to extract any profits from this market. The upward bias
still remains as long as investor sentiment is still extremely bullish, but there is probably greater
risk of a market down draft now than in past weeks."
The changes within the indicators are noteworthy, but there is still nothing noteworthy regarding the indicators.
Over the past week, the expected bounce has materialized and the market is now short term overbought. Will the bulls have the necessary fire power to break the trading range? While certain aspects of the sentiment data would suggest that this is possible, the sum of the data tells me that very little has changed.
Far be it..the provision of easy money is a threat to the monetary order..see price of Gold. And the phrase 'neither bearish nor bullish..' just about sums up the case for inflection. If this were vaguely normal, equity prices might be rising on momentum as the the Last of the Fundamentals drop away, but *sigh* as it is, any new credit will probably be filtered into the equity markets in what is now a futile gesture to successful financial engineering- this is the Fed's and Goldman's baby from start to finish and they simply don't have any room left to throw in the towel.
Saying that, they might well start.
The essentially sideways range over much of the last week has tested risk-appetite for various sectors and apparently it hasn't amounted to much. The question is, why test for risk appetite?
A slow reversal might form an orderly retreat in line with declining consumer-spending over the season as well as matching an obvious, if slightly unusual trend in dollar decline. While increases from here deflate company debt in a small change that might yet significantly alter the composition of foreign-owned real US Assets. That shouldn't matter, except it begins to put the US over a barrel...
Equity daily indices continue to show bearish divergence.
http://www.zerohedge.com/forum/market-outlook-0
Bilderberg got their goodies, puppet Obama gets the screw soon. March puts looking good.
That S&P chart in fig 5 really helps you see how strange this market is.
If you divide the rally roughly in half at the July low, and smooth a bit of the noise in the first half, the peaks and troughs 'rhyme' in a way I have never seen before over such long periods of time.
I don't know if this is meaningful, but it's odd to me, and rather an improbable occurrence given seasonality factors.
Hurricane aimed right up New Orleans ass. Energy play !
SPX 138 PE ratio!
what a fking joke
Yes, but it was one of the most erudite "I don't have a fuckin clue" analyses that I have read in quite a while.
Hey Rocky, watch me pull a rabbit outta my hat....nothing up my sleeve....PRESTO!
Blame it on human nature. People want to make money by speculation rather than earning it. If the CIT bankruptcy and the god-awful jobs report had no effect, maybe the speculators are in denial.
This guy could easly sum up his position by saying " I don't have a fucking clue " Just like evryone else.
Nothing happened in March to even justify this rally unless high P/Es are just " in style "
harsh methinks.
and a tad unfair in that he explains his position of inertia clearly and concisely.
I am, I am sure, firmly in the "dumb money" group, but I cannot see how some "shock" is not going to precipitate a market retreat. It seems to me that both the bulls and bears are somewhat unsure of their opinions. Although, if the CIT bankruptcy and the jobs report had no effect, maybe the market is too complacent (Bernanke/Obama Put) or too controlled by the PPT to ever act on fundamentals.