Investor Sentiment: I Am Still Singing That Song

thetechnicaltake's picture


Last week's change in tune is this week's same old
are for renting not owning at this juncture.
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
is probably greater risk of a market down draft now than in past weeks.

As the only real change to the data is the increased number of Rydex market timers who are bullish and leveraged, I thought it would be a good time to look at how long the "Dumb Money"indicator could go between bullish signals (i.e, investors are bearish)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
Referring to the "Dumb Money" indicator in figure 1, bullish signals occur when investors are bearish or when the indicator is green in color. So what we want to know is theaverage time spent between bullish signals. Since 1990, this number is 18 weeks. In the current price cycle, prices bottomed in March, 2009 and we have continued higher for 29 straight weeks. That is, the last bullish signal (or the last time the indicator was green) was 29 weeks ago.

While the current price run has gone on for 11 weeks longer than average, there have been several longer price runs over the past 19 years. The longest started in October, 1994 and lasted 91 weeks. The second longest started March, 2003 and lasted for 60 weeks; in many respects the current rally and economic environment most resembles (i.e., think ultra low Fed Funds rate and Dollar devaluation) seen in the last bull market. The third longest time between bull signals ran for 49 weeks and started in November, 1998.

The current price cycle has been extraordinary in price but not in time. It is likely that the next bull signal (i.e., when investors are bearish) will be weeks away as it takes the bullish extremes of the current market environment to be unwound.

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
Company insiders continue to sell shares to an extreme degree. See figure 3, a weekly chart of the S&P500 with the InsiderScore "entire market" value in the lower panel. From the InsiderScore report: "Selling was still in favor during a light week".

Figure 3. InsiderScore Entire Market/ weekly
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 bullish and leveraged funds were greater than the bearish and leveraged by 1.77 to 1; referring to figure 4, this would put the green line greater than red line. When this ratio is greater than 2 the rally has generally stalled as noted by the maroon vertical lines.

Figure 4. Rydex Bullish and Leveraged v. Bearish and Leveraged/ daily



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Anonymous's picture

As usual a bearish slant on everything. Notice the " dumb" money peaks throughtout 05-07 and you'll see they were CORRECT in staying long. So much for dumb money. From that chart I'll follow the dumb money since they have been correct. Show me a chart with corresponding articles from zerohedge and we'll see whos the smart and dumb money. Pretty arrogant from a blog thats been consistently wrong, wrong, wrong to disparage others. The kettle calling the pot black??

Ned Zeppelin's picture

Lionhead - you are no doubt infinitely more knowledgeable than I in technical analysis, but I have gotten used to seeing TT's metrics and consider them relevant to seeing if a change has occurred or is occurring, so I'd say keep 'em coming under the no harm rule.  While I am at heart - foolishly it seems - a fundamentalist, I have succumbed to the notion that technical analysis can provide explanations of equities market behavior I cannot otherwise fathom. 

Lionhead's picture

Ned Z, TA gets a bad rap from most folks because they don't understand the tenets & principles. Using more esoteric metrics compounds the confusion, so some folks are going to discard TA unnecessarily as voodoo. I would like folks to see the basics presented in a easy to grasp format without all the opinion,  & analysis of ifs, ands, or buts.

If you think that's impossible look here:


Clean, and straightforward. Each person can add their own individual fundamental view to decide on the interpretation of what lies ahead past the hard right edge of a chart.

As far as stock prices & valuations, unrealistic and improbable prices arise over time in the same fashion over the past 100 years. What we see today is no different from the pricing valuations of the past. IOW, there's nothing new under the sun in our modern age.

Lionhead's picture

ttt, your reliance on these metrics is becoming annoying. I suggest you read the basic tenets of technical analysis (TA) by Edwards & Magee:

Folks here at ZH are basically fundamentalists. Pitching sentiment to them is unproductive as their sentiments are 100% in opposition to what your metrics show. Please go back to the basics in your presentations of TA IMHO.

Anonymous's picture

The dumb $=public

New York City government is so overwhelmed that it is paying $90 per night per apartment to rent unsold new apartments for the homeless. Desperate, the city government is offering one-way free airline tickets to the homeless if they will leave the city. It is charging rent to shelter residents who have jobs. A single mother earning $800 per month is paying $336 in shelter rent.

The political system is unresponsive to the American people. It is monopolized by a few powerful interest groups that control campaign contributions. Interest groups have exercised their power to monopolize the economy for the benefit of themselves, the American people be damned.