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Investor Sentiment: Haven't Seen This in a While
For the first time since September 10, 2010, the “dumb money”
indicator has turned bearish. The Rydex market timers continue to
remain extremely bullish, and company insiders are non-committal.
Consecutive weeks of investor bearishness as seen in the “dumb money”
indicator is generally the best time to buy. Ideally, it would be nice
to have additional confirming evidence such as buying from company
insiders, and it is possible that lower prices might bring out the
buyers especially as prices approach the November, 2010 highs and flirt
with the 200 day moving average on the major indices. Regardless how it
goes over the next couple of weeks, what is undeniable is this: 1)
markets tend to bottom when there are too many bears; for example, since
1991 covering 40 unique instances, the SP500 bottomed 80% of the time
with a reasonable risk (<6% draw down) to capital after two
consecutive weeks of extreme bearish sentiment; and 2) failure of the
market to bottom is a very ominous sign.
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)
MarketVane; 3) American Association of Individual Investors; and 4) the
put call ratio. This indicator is extremely bearish.


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 indicatoris 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.
indicator is 65.96%. Values less than 50% are
associated with market bottoms. Values greater than
58% are associated with market tops.

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At first, I was hesitant to label someone losing money in a completely manipulated market as 'dumb', but they put it in. Carry on.
Too soon. No whining and crying yet by cnbs. And green futures are almost always an contrarian sign - like tonight...no fear and no capitulation.
Our market is going down the tubes, big time.
This is one of the indicators we have been waiting for. The slow burn implosion was intended to accelerate and cannibalize itself. The dumb money folks have drug this out for so long with their ignorance and refusal to acknowlege real economic indicators.
Soon the dumb money lemmings will begin the short stampede over the cliff edge.
III%
The post qe2 correction may be almost over. Very hard to sort this all out.
Good grief. It's an indicator. Not a prophecy.
Is everyone off their meds this morning? Dude proffers a chart and he is crucified for that? I think a few equities have found a short term bottom and I've found some insider buying. With the crappy news of the last two weeks don't you think "dumb money" should be bearish?
This article sucks, but is not nearly as bad as the crap I have been reading in the many letters I subscribe to.
I'm sure that any one of us, if we were amoral enough, could start publishing our own newsletter with a proprietary indicator guaranteed (see important disclaimer!!!) to outperform the market.
I happen to have 4! different techniques that have worked beautifully! Do I have any takers?
Your indicator is worthless.
WORTHLESS.
It's not worthless...but rather it typifies conventional thinking. The problem is, the market is not in a conventional place.
With the algos, with the Fed manipulation, forget TA, the markets no longer exist.
Refuse to participate in the charade, take your money out of all financial accounts except a minimum in small local banks, liqudate all retirement funds while-if you still can. The whole Titanic ponzi is going down in days or months.
Las Vegas will never close.
thank you lawrence1 !!! "Refuse to participate in the charade,"
i have been doing just that since new years 2010. they get all upset when you will not play paper ponzi pony show with them. awwww, cry me a f-n river bitchie banker boyz.
same goes for the next batch of scumbags, our "elected leaders". i've written to mine, and the response can be shortened into this conclusion:
what the bankers want is what the bankers get, so that is all that matters. uphold our oaths of office and represent the People? no we won't do that.
now they must be denied authority. i mean come on, the broke gubbermint declares authority over me? hell, with just three silver dollars in my pocket i can prove i am worth more than either the fed or state gubbermints.
like you said:
"Refuse to participate in the charade"
the time to choose your master has arrived. choose wisely.
the funny part is, the gubbermint drones are having an awakening as well. maybe they shouldn't have played with their drone's retirement funds so soon. then the layoffs at state and county levels, enforcement can become futile for them.
Refuse to participate in the charade, We the People are We the one true Market as well.
now let's as they say, "GIT ER DUN".
treasonists need a hangin, banksters need to pay restitution, and over a million homes need to be returned to their true owners. then we can get on with the next 1,000 things to correct. our work is cut out for us, but it will be fun, unifying and educational.
I agree with your anger, but I can't agree with your actions. Not yet.
By the way, do you mean to return the homes to those who could not afford them in the first place? Who stupidly bought a McMansion? Or the poor guy who lost his job?
I agree with the latter and have no sympathy for the former.
Please check out this link for a Renko chart of the SPX weekly, since 1996.
http://stockcharts.com/h-sc/ui?s=$SPX&p=W&yr=15&mn=0&dy=0&id=p24317912664&a=236687592
IMO, there is a strong likely hood that the current downtrend will produce at least a second down bar, and maybe several more, yielding an SPX level about 1200 or lower. Only in the strong Bull market from 2003 through 2007 did we see a lonely single red Renko bar. This market period featured the roaring real estate bubble and world-wide debt binge. I do not think that another such bubble will form, although the possibility exists with stocks and commodities, due to expansion of emerging market economies. But the Western Economies are, or should be, deleveraging. This is the opposite of the dynamics of 2003 through 2007.
You probably need to copy and paste that link into the URL box. I'm a first time linker, be gentle with me.
You maybe a first time linker, but I am delighted to see that you don't need to invoke the use of the term "humble", when expressing your opinion (twice). Bravo.
Eh, how do you build that Rydex indicator? It seems pointless to me to interpret it in that fashion. The better way to interpret Rydex is to see whether Rydex traders are more or less bullish than the market. Lately they have been fleeing en masse compared to the amount the indices have dropped. Rydex indicator to me indicates that it's possible to drop more but that, unless they turn bullish (which they probably won't because relative performance of Rydex assets is very trend-sensitive) the uptrend is not in question.
This whole situation looks like 2004 to me. It'll have to come down another 4-5% to really break down the uptrend but given the current status of sentiment I just don't see that happening. Typical "dumb money exhaustion" after a major high which leads to a flushout of weak hands without any real significant declines of prices. In the meantime you read "stocks have been going down for 6 weeks straight ohnoes!!!!" while they really haven't come off much at all.
P.s. bearish for the long-term unless solutions are found, bullish for the short-term regardless of solutions.
The real question is "what is the sentiment of the software"?
Is it feeling greedy? Fear? Panic?
Someone would have to look into the algo codes line by line to ascertain HFT sentiment.
The problem is, the software changes sentiment in a millisecond.
But to the point of someone who posted, I don't see how this kind of technical charting can be of much value in a market where 70% of the volume is IBs trading with each other's computers.
If 60-70% of trading is algo, why do we care about what the home gamers think?
Because it is the trader at the margin that sets the current price. Those additional traders as they enter or leave the market establish the current pricing.
There are no $500 hookers, only $500 johns.
That is true; & the "home gamers" have been removing money from stocks for awhile. So, as they were liquidating at the top, were they "dumb money" or smart money like the Wall street schils constantly buying the dip? Is there more wisdom in the crowd, or in Wall street group-think caused by performance anxiety? Which group got the bailouts due to imminent failure? Why the linking to neural networks to determine sentiment instead of market timing newsletters. Is there wisdom in the crowd or wisdom determined by a few?
For more longer term clarity, one might look here:
http://www.martinarmstrong.org/files/Is%20the%20End%20Near%2006-05-2011.pdf
As you will read, it's not going to be as many expect.
I'm confused (about many things in general, but the conclusions of this article in particular).
Figure 1 indicates that we may be approaching a market bottom.
Figure 2 indicates neither a top or a bottom, just no-man's land.
Figure 3 indicates that we have just topped out on an intermediate term about 6 weeks ago, and have a good way to fall until that indicator says "bottom".
What interests me about Figure 1 is not the absolute value of the indicator, especially the ability to call a top. It is the change of direction (the first derrivate) of that indicator that more accurately calls tops and bottoms. The current nominal value is in the bearish region, but the bottom will probably occur (a) after the indicator is closer to the July and September 2010 values, and (b) it reverses upward as it did in early September 2010. It's not ready for the turn, yet, IMO.
Speaking of dumb money, past performance is the indicator of future results, which is what this article is all about. It was therefore it shall be. Dumb, dumber, dumbest.
But what would you expect from a stockbroker cum financial analyst?
The market always looks for fools to pay its bills.
The only indicater worth watching is when Ben decides he needs dumb money, smart money or ANY money to buy bonds.
Attn: TYLER/GW/Bonzai/All powers at ZH/etc
PLEASE LOOK INTO THIS WallStreet Journal WaMu STORY-
IT's HUGGGGGE!!!!
Hipster Battles Funds By MATT WIRZ
Nate Thoma stood up in a Delaware bankruptcy court last December in a sharkskin suit and delivered a 24-minute argument that changed the course of one of the largest bankruptcies in U.S. history.
Aimee Kvasir
Nate Thoma, shown in 2006, changed the course of a bank bankruptcy.
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The 33-year-old Washington Mutual investor, with no legal experience, delivered what people in the courtroom called an unusually eloquent speech, helping persuade the judge to investigate trading by some of the nation's biggest hedge funds and to reject a plan for the bank's exit from bankruptcy.
The net result was a settlement between small investors and the hedge funds, which included Appaloosa Management and Centerbridge Partners. That deal has paved the way for the bank to exit from bankruptcy and gives the little guys a chance of recovering some of their losses.
Nate Thoma's Testimony"There' s a subset of our population recently that seems hell bound on amassing as much money and power as they are able at any cost." -- Nate Thoma
Listen to Mr. Thoma's Testimony
Mr. Thoma's court appearance added new drama to an already contentious case, which began when the U.S. government seized the bank in September 2008. The court-ordered probe riled hedge-fund managers, who said they did nothing wrong, and made Mr. Thoma a folk hero among Washington Mutual's legions of small investors.
Mr. Thoma, who had traveled from Queens, N.Y., to lodge his objections in person, came across as "intense and smart," though "somewhat lacking in experience in the legal arena," says Edgar Sargent, a lawyer representing Washington Mutual's shareholder committee.
Sitting in a Greek tavern in Astoria, N.Y., on a recent afternoon, sporting a hipster-perfect scruffy beard and dressed in a plaid shirt and jeans, Mr. Thoma recalls thinking Judge Mary Walrath would cut him off after a few minutes.
"But halfway through, I noticed she was paying attention," he says. "I realized she was going to let me go on, and I went for broke."
Mr. Thoma, who gave up computer programming to become a trader in 2005, estimates he probably made 10 times his money in Washington Mutual, in part because he bought up cheap securities that will get a payout.
Mr. Thoma spent as many as 10 hours a day analyzing various pieces of the Washington Mutual case before appearing in court, and presented 33 pages of documents. In her written opinion, Judge Walrath cited Mr. Thoma's arguments six times, though she pointed out that much of his evidence was inadmissible.
"Some things were wide of the mark," concedes Mr. Thoma. "But it's my first bankruptcy."
No wrongdoing by the hedge funds was proved by the investigation ordered by Judge Walrath. Appaloosa and Centerbridge, as well as Aurelius Capital Management and Owl Creek Management, were ordered to divulge trading records and answer questions from lawyers for common shareholders.
The funds declined to comment, as did Washington Mutual's attorney.
Case DocumentWhile Mr. Thoma's impact on the case could inspire other small investors, they probably won't get as loud a voice. Judge Walrath was particularly attentive to smaller shareholders during the Washington Mutual case, in part because of the number of individuals hurt when the bank was seized, according to people involved in the case.
Soft-spoken and with about $500,000 in investments, Mr. Thoma is an unlikely agent for change in the halls of American finance and an even more unwelcome adversary for the hedge funds involved. His actions infuriated the likes of David Tepper, head of Appaloosa. They also served as a call to arms for small investors in the case, many of whom lavished him with accolades on Yahoo message boards.
When Appaloosa responded to Mr. Thoma's claims with demands for research, correspondence and trading records, shareholders, many of them from Europe, rallied to Mr. Thoma's defense, flooding the Delaware court with more than 150 objections. "Apparently, I'm big in Switzerland," he says.
Mr. Thoma, who didn't finish college, says he taught himself to trade, much like he taught himself computer programming. He is also following in the footsteps of his grandfather, who actively traded and retired early on his stock-market investments.
"When I was little, he would show me stock charts, but it didn't register," Mr. Thoma says. "Years later, it occurred to me, 'I can do this.'"
His transformation from small-time investor to activist shareholder began following the seizure of Washington Mutual. Mr. Thoma's shareholding in the bank was wiped out. He spent weeks in front of his Scottrade account, trying to figure out how to recoup money he had lost.
"I started looking at the capital structure, and I saw an opportunity to make back my investment," Mr. Thoma said. He bought trust preferred securities, a hybrid of debt and equity, which rank above common and preferred shares. That enabled him to essentially jump ahead in line for any money distributed from the bank's estate.
It also put him in the same pool as Appaloosa, Aurelius, Centerbridge and Owl Creek, which were snapping up the same securities.
Those securities were quoted at around one cent in November 2008, when Mr. Thoma first started buying—they are now at 16 cents—but they rarely traded and were hard to buy through his online brokerage account.
In the following months, Mr. Thoma bought in lots of 500 or 1,000 units. But he noticed other investors were occasionally able to buy them in much larger amounts, at one point as many as six million units in a day.
"I was envious," he said. "They were like whales passing in the night."
Mr. Thoma suspected the buying was being made by hedge funds, which already owned the bank's bonds. Owning large chunks of both classes of securities would help them control the bankruptcy's course, he figured. While this practice is standard in most bankruptcies, in the case of Washington Mutual, the hedge funds' strategies affected thousands of retail investors, who still owned the bank's securities.
In his December objection, Mr. Thoma said he thought it was unfair that hedge funds were able to eventually negotiate on behalf of trust preferred holders, seeing as they were also bondholders and involved in settlement talks. He questioned whether they were acting in all of the preferred holders' best interests.
Judge Walrath listened, and ordered the probe into the buying.
Mr. Thoma says he is still obsessed with the case, and his wife has banned Washington Mutual from household conversations.
But this battle is likely to be his last. He says that despite his success, his experience has left him disillusioned.
"The thrill is gone," he says. "It's such a big game, [individuals] just can't compete. I'm picking up freelance Web work again."
Write to Matt Wirz at matthieu.wirz@wsj.com
http://online.wsj.com/article/SB1000142405270230477830457637788081016738...