Investor Sentiment: Marking Time

thetechnicaltake's picture

If a market top is developing, it will take several weeks to do so as the bullish extremes of the last several months need to be unwound. I have been stating the following for several weeks now: 1) the greatest gains are behind us; 2) the markets are to trade in a range with an upward bias; 3) there will be a bid under the market; 4) it will be tough to short or bet against this market for the foreseeable future. When I first wrote those words on August 8, 2009, the S&P500 was at 1010.48; on Friday, the S&P500 closed at 1016.40. For the last 4 weeks, the S&P500 has been in a 60 point range. There is little follow through on either side of the equity markets. Outsize bets in either direction are not warranted. However, sector bets may still prove fruitful with commodity based sectors and ETF's outperforming.

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
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 their shares to an extreme degree. See figure 3, a weekly chart of the S&P500 with the Insider Score "entire market" value in the lower panel.

Figure 3. Insider Buying v. Selling/ "Entire Market"/weekly
Our last look at investor sentiment comes from the Rydex bullish and leveraged (green) v. the Rydex bearish and leveraged (red) assets. See figure 4 a dailychart of the S&P500. After starting the week very bullish, these market timers threw in the tool as the market moved lower. Of course, if they had stayed only a few more days, Friday's lift would have bailed them out.

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


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MinnesotaNice's picture

Nice and concise... I like your style... get to the point without a lot of fanfare... refreshing...

Hephasteus's picture

I would just like to say that it appears the market doesn't want outsized takes. What if it can't get what it wants?

Anonymous's picture

I would consider myself your typical "dumb" retail investor but i've done very well since march. I'm up 40% mostly on commodity ETF's and bank stocks. I was all in cash before the market crashed last september ... So all in all i outperformed most hedge funds. Good analysis although I think commodity's are going to remain in a range. Financial stocks have a lot more room to run ... they're gonna report great earnings again.

NHL's picture

Looking at the historical data and charts that you've posted, it seems that the dumb money is making $$$ hand over fist. Spoke to  a lot of retail investors and they are making $$$$ from the run since March. Spoke to the pro and the picture is mix.

thetechnicaltake's picture

There have been times in the past --1995, 2003, and now 2009- where the "dumb money" just got bullish and the market just kept going higher; it happens. During these times the "smart money" is likely to underperform.  But when you look at the price cycle or cycle from fear to greed and back to fear, the markets will clearly perform better -that is gains can be made a lot easier when the "dumb money" is bearish (i.e., bull signal).

Anonymous's picture

government will not hesitate to use swine flu to "stimulate" economy!!

Anonymous's picture

Commodity sectors out preforming? Huh? You might want to open a chart or 3.

Anonymous's picture

A number of times I've seen the insider selling statistic, but nothing that shows whether or not it has any predictive value.

Anonymous's picture

charts without volume ...what a novel idea...

3greenlights's picture

Nice presentation, triple T.

"Outsize bets in either direction are not warranted."

Good words of caution.