Investor Sentiment: Bull Signal Awaits

thetechnicaltake's picture

The "dumb money" indicator is now showing that investors are extremely bearish, and this is a bull signal. On average, the best time to buy is 1 week after the signal. Several caveats are worth noting.

First, about 80% of the signals will produce positive results within a reasonable draw down. What is meant by "reasonable"? The SP500 should bottom within 6% of next week's buy point. If the SP500 drops below next week's buy signal by more than 6%, then this is a failed signal. A failed signal is the market's way of saying that what we expect to happen has not happened, and failed signals can lead to very strong moves opposite to those expectations.

Second, the current extreme reading in the "dumb money" indicator is not supported by other measures of investor sentiment. For example, the Rydex market timers are still showing extremes in bullishness and in some sense, they have been unwinding their bullish positions over the past several months. By no means are they bearish, and this data series is looking more like a market top than a market bottom. Corporate insiders did hit extremes in buying 2 weeks ago, but like the current "dumb money" indicator reading, these were only "mild" extremes. So what does it mean? The resulting snap back rally is likely to be weak and unlikely to carry as far as a rally that begins when all of our measures of investor sentiment are showing much greater extremes of bearishness.

The market has bottomed where one would expect it to have bottomed -- near its 200 day moving average. I am sure this has brought a sense of order and relief to the bulls and to those investors who were buying the kool-aid only 2 short months ago. Ahh, this is how bull markets function. Now that this temporary blip (mis-pricing) is over, we can get back to the business of being bullish. I am not trying to discount the current bull signal. A bottom is being forged. It would be nicer to have seen greater extremes in bearish sentiment at the bottom as this leads to stronger future returns. I could just as easily make the case that this is the last gasp of an aging bull market. 

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 showing extreme bearishness.

Figure 1. “Dumb Money”/ weekly

Figure 2 is a weekly chart of the SP500 with the InsiderScore “entire market” value in the lower panel. From the InsiderScore weekly report: "S&P 500: Sentiment Remains Positive But Volume Declines.... Russell 2000: Number of Buyers Drops But Sentiment Remains Positive. "

Figure 2. InsiderScore “Entire Market” value/ weekly

Figure 3 is a weekly chart of the SP500. The indicator in the 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 indicator is 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. Currently, the value of the indicator is 62.78%. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops. It should be noted that the market topped out in 2011 with this indicator between 70% and 71%.

Figure 3. Rydex Total Bull v. Total Bear/ weekly

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GNWT's picture

Technichal take?


A wonderful example of nonsense, IMHO.


Lehman and Bear Stearns went down in a week.


There is a moment when you can't pay your bills, it's a process, but 

make no mistake, if you think this nonsense will go on forever, you 

are severely deluded, IMHO.


60-90 days there will be a new Europe, it will happen in the midst of the Presidential 

election, so, any time, but will be accompanied by the BK of JPM and BAC.


The war in Iran will be floated and depending on the reaction of the populace will be

the distraction/false flag that will set it all in motion.

Americans are like the passengers on the Titanic...if they knew what was happening at the controls they would be very scared.


I used to be sanguine but I finally realized, with Greece, Spain, etc that they arent very smart crooks/criminals/murderers...


Two events sealed my view....

1. Morgan waits and brings FB public during May in the middle of a currency I have seen more ticks since 1987 than any human alive (not hyperbole) and I know 3 years after I started that you don't to anything like this in May...


2.  JPM...wait till the Silver vigilantes get ahold of Jamie Dimons carcass as Silver exploded in price.

Dimon was untouchable until the fuck up which is not a one-off as they will plead.

Too visible for Ben to hide now, so Dimon is on his own like a bleeding swimmer in shark water.


Should be fun.


I have been waiting half a life time for his, so a few more months is fine.


Stay liquid my friends, 




I don't always trade stocks but when I do, I prefer the NDX...

Setarcos's picture

Dunno about fun, exactly, but game is more or less over.

Personally I am about to buy a distressed house for cash and remain liquid, though who can tell when everything goes pear-shaped, even for Dimon and his ilk.

Yep it sure would be fun to see the financialists go under, but there is the zionist "Samson Option".  "Either agree with us, or we take everything down."


Shibumi2's picture


The market may move up or down. Based on a timeline which is far too short and a methodology which is statistically irrelevant, we guess the market may move up...although we don't feel STRONGLY it will move up which means that it may move DOWN much more extremely than it otherwise would if we felt MORE strongly that it woulld, indeed, move up.


In our worldview, guessing the future value of a market is determined by guessing the direction of a squiggly line on a chart rather than looking at underlying fundementals such as how much a company made, its products, market fundementals and other boring stuff. This is a highly accurate methodology, except when it isn't. and when it isn't, it is much LESS accurate than it otherwise would have been had we believed otherwise.


If you  are the kind of investor who thinks like this too, we would LOVE to send you our CONVOLUTIONIST INVESTORS NEWSLETTER, free of charge, crammed full of similarly useful suggestions. From time to time we may offer our INVESTOR INSIDERS special offers based on our methodologies and market timing signals.


Our Brooklyn Bridge futures (NYSE: BOOB) are up a whopping 69% this month alone and we are expecting pumpkin futures to peak in early December.





ebworthen's picture

Latest Euro-rescue fairy tale being spun, skittle shitting unicorn time.

When reality catches up to the circus and calliope again, it will be dead unicorns until more cotton candy is handed out and storytime begins again.

If you like chasing perverse carnivals - best of luck.

The Monkey's picture

I can see how the news could be bullish.. Contingency plans are announced for Greece immediately following the election, the Fed extends Twist, ECB cuts rates, further sabre rattling in China reg stimulus, etc.

I would rather short treasuries here than go long stocks though.

GNWT's picture

Yo, Money. 

Got a Japanese friend who said the same thing.


But, no sweat, he has been getting @.9% for 20 years.


Good luck with that Treasury trade.


Stay liquid my friends, 




PS Humble advice, short after the market bounces off 2420-2450 NQ.


Plenty of time if this is the big one.


You know what they call someone who catches the top or borttom.



Setarcos's picture

Charts?  Based on just a few decades relative economic stability.

How about the historical picture.

A few weeks back I recommended watching:  for the four hours it takes to broadly cover at least 400 years of banking, etc from Venice and right through until the present day of financialism and derivatives.

This documentary is as comprehensive and as unbiassed as possible, in my view.

I urge everyone to watch/listen to it in segments which suit ... though, at 69, I am retired and with time on my hands, I could not take it all in at one hit.

Though I am very familiar with the topics covered, I had to take time out to contemplate.

Well I have contemplated and have now viewed the entire on the history of Western banking/financialism.

That's why I am now urging others to take the time to view/listen.


q99x2's picture

Obviously another graduate of Hogwarts. Still, better than a graduate of Harvard.

adr's picture

If you think you know where the market is going to be a week from now, you're obviously a fool.

Go put a bet on red right now for next Monday at 1:47 PM, it's got the same odds.

Pike Bishop's picture

ICI Mutual Fund numbers have taken a brief pause, in retail evacuation. Using that as the "dumb money" indicator, shows that a confirmed front of moving 'dumb money" has been way smarter than Hedge Funds for the past 4 years in domestic stocks. For the most part I just buy shit at better value points.

zorba THE GREEK's picture

The best time to buy stocks was in the last millenium.

Since then, it is so rigged that it serves only one purpose; to 

separate a fool from his money. Buy silver and gold and sleep sound.

Setarcos's picture


"The best time to buy stocks was in the last millenium.

Since then, it is so rigged that it serves only one purpose; to

separate a fool from his money."

Agreed, but who are you telling to buy silver and gold?

Only the very rich (in $s) can afford to buy silver and gold in significant amounts ... and then PHYSICAL in the form of coinage which can actually be exchanged for goods or services.

When silver and gold coinage was in circulation as "legal tender" it was stamped with a (fiat) face value of 5c, $1 or whatever, so that a trader knew how much change he might give in copper.

If, today, you went into a shop with a one ounce silver dollar ... then tried to persuade the shop owner that your coin was really worth $30, he would tell you to get lost ... unless he too was gambling with PMs.

In order for any medium of exchange to work it HAS to be fiat and accepted by the great majority of people at face value.

Neither silver nor gold are money, unless minted as coins with a fixed rate of exchange for other coins, goods, services, etc..

Paper money is perfectly good, if viewed as some kind of certificate that some amount of labour has been done, which equates with the effort expended on whatever the promisory note is to buy from someone else.

The bottom line is that all media of exchange are fiat and subjective.


ebworthen's picture

Does this mean that pussy is fiat, or tangible like GOLD?

Setarcos's picture

BOTH, work it out with your tongue, penis and whatever you are willing to pay.

BTW I am no prude.  I have paid for pussy many times, if mostly via losing houses and only occasionally with prostitutes.

All fiat anyway, e.g. the value a man places on the intangible of getting his end away.

Of course far more comes into it (sic intended) when a child results and when long-term attachment is involved, but I do not expect you to understand anything beyond navel level, if that.

Grand Supercycle's picture

Rally Warning from last week:

'Daily chart now gives bullish warning and significant
SPX rally & USDX retracement should commence in a week or so'

Newsboy's picture

I'm not sittin' on the sidelines.

I left the building long ago...