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Investor Sentiment: "When?" is the Big Question

thetechnicaltake's picture




 

Last week I stated that a close below 1407.75 on the SP500 would be a double top, and with the SP500 closing at 1406.58, we have our signal. A weekly close below 1398.04 would provide confirmation, and kick off a multi-week sell off.

It isn't so much that investor sentiment has gotten bullishly extreme (i.e., bear signal), but how we have arrived at this point. At the bottom 3 months ago, investors weren't really all that bearish as they were expecting QE3. The Federal Reserve has told us we will get QE3 for weeks now, but what the threshold for triggering that event will be remains unknown. This is a rally based upon hope and vapors (i.e., diminishing volume). It is a market with little investment merit, and investors have made it clear that the only thing that counts is more QE3. Yes, we are having more QE, and Bernanke confirmed as much at Jackson Hole. But "when?" is the big question.

Looking ahead, the calendar is certainly filled with many opportunities for QE announcements thus giving investors multiple opportunities for hope. All the jawboning is likely to wear thin if the Fed doesn't deliver. The most obvious trigger for more QE will be lower prices on the SP500, but this seems impossible as the market has had difficulty of clearing itself of weak hands for over 5 months now. This a sign of a market top by the way, and without that big sell off or scary market moment when the world is looking really grim, it is unlikely that this market will move appreciably higher over the next several months. And this has become the real paradox for those investors who have pinned their hopes on Ben Bernanke and the Federal Reserve to deliver more QE.

Waiting for the Fed to pull the trigger has produced another problem for investors. This is inflation. While the Fed does it best to keep the balls in the air without really doing anything, real assets (gold and crude oil) continue to move strongly upward. These are signs of real headwinds for the equity markets. $4 a gallon gasoline is a real headwind for the economy. Can the Fed figure out a way to have its cake and eat it too?

Price is the final arbiter. A weekly close below 1398.04 on the SP500 confirms the double top. It really is that simple. Sentiment indicators, like the "dumb money" will likely rollover as well. A weekly close above 1426.68 on the SP500 will likely lead to an acceleration in price. So pick your poison. Understand where you are on the playing field. If you pick (guess) wrong, don't stay too long.

 

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 bearish, and just above the extremely bullish level.

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: "We continue to see moderately high levels of selling across the market. From a historic perspective, the volume of activity is not particularly egregious, but there is obviously far greater conviction amongst sellers as compared to buyers. The Russell 2000 is now the leading contributor of negative sentiment and amongst sectors Consumer Discretionary and Energy are showing some of the worst sentiment."

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 71.24%. 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 72%.

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

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Mon, 09/03/2012 - 21:01 | 2759114 XtraBullish
XtraBullish's picture

Everyone that homes in on ZeroHedge is convinced that the "Next Crash"  is just around the corner - just like Spring 2009 and August 1982. When  will you clowns realize that this market has NOTHING to do with ANYTHING other than currency debasements and if you continue to own a depreciating currency(ies), you will be left behind. The "powers" are in RE-FLATE mode and won't stop until the banks have 180 quadillion "new" fiat currency units that dwarf the Trillion U.S. DEBT dollars that are the albatross. SHORT CASH by owning ANYTHING but cash and by shorting stocks, you are going levered-long CASH which is going to torpedo your net worth bigtime.

Never underestimate the replacement power of equities within an inflationary spiral.

Mon, 09/03/2012 - 20:23 | 2759041 JuicedGamma
JuicedGamma's picture

Maybe we could get Bonzai to mock up the Fed withits balls in the air.

Mon, 09/03/2012 - 20:19 | 2759029 JuicedGamma
JuicedGamma's picture

My weak hands were cleared in April. Bring it on.

Mon, 09/03/2012 - 16:50 | 2758611 Colonel Klink
Colonel Klink's picture

I'm waiting for everything to go BOOM, then people will wake up.  Alas, it will be too late for most of them.  Funny how people will ask "how did this happen", while it's been happening in front of their very eyes.

 

I just wished it would hurry up.  I'm getting tired of waiting.  As someone else said, I'm suffering from ICS too. 

Mon, 09/03/2012 - 20:07 | 2759004 Vendetta
Vendetta's picture

it has been 'BOOM'ing all along, most are just deaf ... baltic dry index seems to be saying something boomish:

http://investmenttools.com/futures/bdi_baltic_dry_index.htm

Mon, 09/03/2012 - 18:19 | 2758809 Imminent Crucible
Imminent Crucible's picture

Just like the Giant Housing Fraud Bubble, it happened right in front of their eyes, and they never saw it until it blew up. Then everyone thinks (but no one says out loud) "How could I have been so stupid?"

Answer: In the same manner you're being stupid without realizing it right now. It's the most natural thing in the world.

As for that imminent crash: The market ALWAYS does the most obvious thing, in the least obvious way.

Mon, 09/03/2012 - 16:06 | 2758482 q99x2
q99x2's picture

This rally is directly proportionate to the level of criminal activity in banking and politics. The higher it goes the closer we are to civil war.

Mon, 09/03/2012 - 14:34 | 2758200 ebworthen
ebworthen's picture

Looks toppy to me but I wouldn't short it as Ben is ready to put a floor under everything.

Mon, 09/03/2012 - 14:12 | 2758137 zebrasquid
zebrasquid's picture

What happens when the market figures out that Obama is a one termer?
Romney kills QE sugarplums and the market has to adjust itself to the new old normal....

Mon, 09/03/2012 - 20:10 | 2759010 Vendetta
Vendetta's picture

I would love to see Romney kill QE but I will bet 1 oz of silver that he wouldn't

Mon, 09/03/2012 - 13:18 | 2757976 negative rates
negative rates's picture

Whos vapors? yours, it should read a thin film of liquid, once you go vapor lock, its all down hill from there.

Mon, 09/03/2012 - 11:06 | 2757682 yt75
yt75's picture

crash soon

Mon, 09/03/2012 - 17:05 | 2758586 Pseudolus
Pseudolus's picture

The VC's in tech space  resurrecting Pets.com - i'd say thats a crash indicator if ever there was one

Mon, 09/03/2012 - 20:24 | 2759038 JuicedGamma
JuicedGamma's picture

Where's the sock puppet?

Mon, 09/03/2012 - 14:00 | 2758098 LMAOLORI
LMAOLORI's picture

 

 

Not until after the election 

 

At Jackson Hole, a growing fear for Fed independence

http://www.reuters.com/article/2012/09/02/us-usa-fed-politics-idUSBRE88109Q20120902

Mon, 09/03/2012 - 12:47 | 2757907 zaphod
zaphod's picture

Don't worry, on Nov 3rd the MSM will go back to letting everyone know just how bad the economy is again.

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