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Investor Sentiment: 3 Basic Tenets to a Market Top

thetechnicaltake's picture




 

When it comes to market sentiment there are 3 basic tenets that suggest to me that the current market dynamics will lead to a market top as opposed to a launching pad for the next bull market. First, investor sentiment at the recent lows (7 weeks ago) was not extreme. Therefore, the subsequent rally was expected to be weak as the "rubberband was not stretched to tight". Second, when considering the price cycle, which is the path prices take from low to high and back to low again, every sell signal should be followed by a buy signal. Our models have had their sell signal (April 20, 2012), but we have not had a proper buy signal yet. Third, consecutive sell signals (without intervening buy signals) are a sign of a market top. This observation is consistent on both a daily and weekly time frames, and it is consistent with the kind of price action we are currently seeing.

When we put this altogether, it is difficult to see substantially higher prices without investors becoming more bearish. The best way to see increasing bearishness is to have lower prices. Lower prices will certainly bring the Federal Reserve into action. As a variant to these observations, I think the Federal Reserve has been laying the ground work over the past couple of months based upon the unemployment situation, and this may prompt action prior to a stock market fall. In fact, the only thing that can circumvent the price cycle is QE3. The question becomes: will we get Fed intervention before equity prices fall or after.

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 neutral.

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: "Market-wide insider sentiment was Neutral last week as insider trading activity hit a seasonal low-point. In fact, the number of unique non-10b5-1 plan buyers and sellers was the second-lowest in our 445-week (dating back to January 1, 2004) tracking period, bested only by the third week of April this year. Activity will begin to pick-up late this week/early next week and transactional volume will increase significantly as insiders at the first-round of earnings reporters are free to buy/sell again. "

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 67.52%. 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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Mon, 07/23/2012 - 10:30 | 2642449 Grand Supercycle
Grand Supercycle's picture

SPX bearish weekly chart strengthens: an important development.

As mentioned on Friday, SPX downleg continues.

Useful SPX weekly chart at blog.

http://www.zerohedge.com/news/2012-12-24/market-analysis

Tue, 10/30/2012 - 12:47 | 2931758 smartmil
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Fri, 10/19/2012 - 04:39 | 2903659 jaffa
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Wed, 10/17/2012 - 03:51 | 2897457 jaffa
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Mon, 07/23/2012 - 10:29 | 2642439 silverdragon
silverdragon's picture

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Mon, 07/23/2012 - 10:15 | 2642369 asteroids
asteroids's picture

QE3 won't work. It'll set off huge increases in fuel and food. It'll make things worse for the economy. The price of everything will skyrocket, including interest rate! The stock market will lift, but, then crash.

Mon, 07/30/2012 - 10:35 | 2662138 TrulyStupid
TrulyStupid's picture

But QE3 is the only way the MI/Bankster complex can finance their ongoing public wealth destruction activities.. they won't raise their own taxes, can't borrow from anyone else... ergo the money will be created out of thin air and dillute the purchasing power of the other dollars out there.

The sheeple (most of whom are complicit in the neo-con agenda) will turn on each other, forcing unemployment  and confiscating the remaining wealth of the lowest income percentiles.

Mon, 07/23/2012 - 10:32 | 2642457 hedgehog9999
hedgehog9999's picture

Exactly!!, that's why QEIII is on hold, the drought in the mid west + the war drums pushing oil prices are having the effect on a leash on QEIII which will eventually occur when food prices drop and oil prices drop regardless of the SPX level...... 

Mon, 07/23/2012 - 10:13 | 2642361 TahoeBilly2012
TahoeBilly2012's picture

Stop and think about it, the criminals in New York have stolen as much off the land as they can, now they will flee the sinking ship.

Mon, 07/23/2012 - 09:44 | 2642261 hedgehog9999
hedgehog9999's picture

There you go!!! SPX down a full 40 points from the top of the uber manipulation for those permabulls.

Anybody that bought over 1360 got their head handed over to them, but we 're not done yet as 1280 is the minimum target on our route down to probably 1200 or lower........

Mon, 07/23/2012 - 09:17 | 2642167 Watts_D_Matter
Watts_D_Matter's picture

I like $BPSPX on StockCharts.com....Buy when the reading is below 30, along with RSI below 30...Prtetty good gauge on a market bottom....Using weekly charts are a good choice too...has a pretty good track record based on the past 20 years....JMO...

Mon, 07/23/2012 - 08:42 | 2642043 One World Mafia
One World Mafia's picture

When it gets to '90s highs crash the market.

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