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Investor Sentiment: Get a Parachute?

thetechnicaltake's picture




 

Like last week, the "dumb money" remains extremely bullish and the "smart money" is bearish. What is also certain is that the bulls remain in control, yet the best gains are clearly behind us. What is uncertain is what happens when the music stops - will you find a chair to sit in or will you need a parachute? The 2010 liquidity love fest ended in the May 5 flash crash, and the 2011 version saw the SP500 drop 18% in 3 weeks. I ask myself everyday: if I am buyer today will I be able to get out of this market safely and without a parachute? Without a pullback to buy in to, I have my doubts.

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 shows extreme bullishness.

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: "Insider selling levels remain elevated, however, conviction lessened slightly this past week and there were modest increases in the number of buyers and companies with buying. The biggest change occurred within the S&P 500, where a bust of buying was followed up this past week with a near record number of weekly sellers. The Materials sector was one of the leading sources of selling and buying within the Banking industry decreased suddenly and dramatically."

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 71.72%. 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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Sun, 03/04/2012 - 21:25 | 2222900 spine001
spine001's picture

The problem is really simple. There is way too much "fiat" capital around. If that capital were allowd to grow at higher than inflation rates, the long term trend (or in engineering terms the limit with t -> infinite) would be infinite capital. Given that there are only a finite number of resources. Capital CAN NOT be allowed to grow faster than inflation. If it were we would soon all be slaves working for nothing for a precious few (those with physical power since the relevance of "fiat" capital will quickly dissapear by virtue of inflation. Remember, the fact that we don't see inflation yet in the CPI, doesn't mean that there isn't inflation, only that it can't be translated yet to prices due to diminishing demand. Those who study this phenomenae know very well that what happens is that first R&D is cut or seriously compromised, then customer service, and quickly poduct quality starts to decrease. All this is critical to maintain corporate margins with increasing raw material, energy, financial and tax costs. So CPI measurements in this setting are pure BS... Obviouslly this progression creates a self destructing system...

What we are seeing are the desperate attempts of CBs politicians and burocrats to manage this unsustainable situation without a clear understanding or worse even, without any agreement to where we should go next as a system to replace the currently failed one we have...

To complicate matters even more, we are seeing two thought schools trying different experiments, since nobody and I repeat NOBODY knows the outcome of what is being done today. One school is trying to move forward by forcing auterity to live within ones means and grow from a sane rational economy, while the other one is trying to dilute the value of capital (through multiple forms of QE or printing of fiat money) to force its holders to invest it at risk or to loose it through dilution (also known as wallpaperig with 100 dollar bills :) ). The problem that their experiment has had is that the key players are refusing to take risk and are investing it in complex structures that are mostly non-produtive but that keep taking value, real value from the productive activities (for intance the use of CDS for hedging vs. for speculation due to leverage). This behavior of the key players is incented unkowingly or knowingly through impotence to do anything about it by the CBs, politicians and their burocrats.

An analogy is an addict trying to quit his addiction, where the politicians are the addicts (addicted to easy money to solve their political problems, i.e. extension of the unemployment insurance), and the Treasury in the US (ECB in Europe) are the parents. The addict not understanding or accepting that he/she is addicted keeps on manipulating the parents into supplying him/her with money for his/her addiction. The parents not understanding that living with an addict has made them also sick, keep on allowing themselves to be manipulated, despite knowing better, and keep on providing resources to the addict based on his/her promise that he/she will soon stop his/her addiction.

Doesn't this sound familiar? Any psychiatrist or recovered addict will tell you how this will end and that the more resources that you provide the addict, the worse you will make his/her addiction, the lower he/she will fall and the worse it will be his/her recovey process...

In the USA, Bernanke and the FOMC committee are the parents and Obama and Congress (to be equally blamed) are the addict.

The only remedy is well known to the professionales:

1) Commitment to a "DETOX" institution by force

or

2) The addict will need to fall so low and his state will need to be so terrible that he/she recgnizes that he/she needs help and will ask to be voluntarily institutionalized

Sadly the likelihood of 2) happening is a lot lower without major irreversible damage to the addict or even his/her death.

Why are we in that cycle? Have we all become psychotic? Who is going to bring some sanity to the world of finance? Are we doomed to a major crisis?

I have faith in humanity, I have seen us rise from the level of mere animals to the social development we have today. Sanity will prevail. We will find the solutions to DETOX the addict.

Until next time,

Engineer

 

Sun, 03/04/2012 - 21:58 | 2222951 blueridgeviews
blueridgeviews's picture

Man, how old are you? You've seen man rise from the level of mere animals to the social development we have today?

Sun, 03/04/2012 - 22:24 | 2223007 Rynak
Rynak's picture

^

That is the only troll post so far in this thread (and by a well known account, having a *track"-record of doing just that), as opposed to (at the time of this post), all the other junks, done probably by a single bitch.

Sun, 03/04/2012 - 21:06 | 2222846 Boilermaker
Boilermaker's picture

I simply cannot come to grips that this absolute FUCKTARD gets to post on this site.

These posts have to be the lightest, fluffiest, pile of shit ever.

WHAT....THE....FUCK?!?!

Sun, 03/04/2012 - 20:54 | 2222822 HungrySeagull
HungrySeagull's picture

Golden Parachute on risers of Silver.

The rest of the paper will burn; Market included.

Sun, 03/04/2012 - 20:25 | 2222788 JohnKozac
JohnKozac's picture

 

 

Land sales in Shanghai plummet 

Business | Real estate
2012-3-3

LAND sales plunged in Shanghai in the first two months of this year amid sluggish sentiment as real estate developers remained cash-conscious in general after government austerity measures to curb housing speculation...

http://www.shanghaidaily.com/article/list.asp?id=66

Sun, 03/04/2012 - 19:49 | 2222737 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

After watching a some clips of a very serious and focussed Ron Paul this evening, Tarantino's Pulp Fiction comes to mind.

Who's the FED? The FED's dead, baby. The FED's dead ...

Sun, 03/04/2012 - 20:51 | 2222826 covert
covert's picture

your parachute will be defective.

http://expose2.wordpress.com

 

Sun, 03/04/2012 - 20:06 | 2222761 tickhound
tickhound's picture

heheh,

Who's money is this?  It's paper, baby.  Who's paper is this?  The FED's...

Sun, 03/04/2012 - 19:11 | 2222654 MrSteve
MrSteve's picture

The high beta correlations among so many asset classes and markets are mirrors of the coordinated central bank money printing operations. Can you afford to fight the FED? It might really be the time to flee if you have capital gains to preserve ahead the 2013 capital gains and dividend tax increases taking effect on January first.

After the ECB and LTRO, how can anything but gold be AAA?

Sun, 03/04/2012 - 20:31 | 2222795 devo
devo's picture

That capital gain tax is going to crash the market.

 

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