This page has been archived and commenting is disabled.
Investor Sentiment: Unwinding
Investor sentiment hit a bullish extreme when the Federal Reserve announced QE3 6 weeks ago. Sunny skies and clear sailing ahead were proclaimed by all those who only know one thing: how to be bullish. No wonder mom and pop investor are soured on Wall Street. Just when "they" tell you it's a can't miss market, well the market stumbles. The QE3 breakout has failed, and prices are below the QE3 announcement lows. Failed breakouts tend to see strong reversals in the opposite direction, and the foundation to this rally (rising prices on poor volume -- remember how the bulls swept this technical tidbit under the rug during the rally) is very poor. As stated last week, "The failed breakout following the QE3 announcement should be concerning to the bulls", and for the past several months, "This is a market top". Now prices and sentiment are unwinding, and I suspect it will require much lower prices to bring about the next buying opportunity.
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, and just below the extremely bullish level. Bullish sentiment is unwinding.
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 trading volume is seasonally light across the market as most companies have closed trading windows, effectively prohibiting insiders from buying or selling until after the release of Q3'12 earnings. This past week, sellers outnumbered buyers by a 7:5 margin market-wide and the top-line sectors showed Neutral sentiment readings. "
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 70.63%. 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
TheTechnicalTake offers a FREE e-newsletter:
Visit TheTechnicalTake website: 
- advertisements -
When this one hits only HFT algos will be left swimming around. It will be interesting to see what prices they discover on their own.
And once again, the entire distinction between what some lazy pundits characterize as "Smart Money" and what they characterize as "Dumb Money" is now as facile - and wrong - as it is smarmy.
The extreme culling of retail investors and even small institutions from the stock market and into the bond market since the Great Crash means that those who remain in the stock market tend to be the cream of the former crop: smarter, more experienced, more savvy, and perhaps quite a bit bolder than may be imagined. Many of them, in fact, are those who have left Official Wall Street, voluntarily or otherwise, over the past decade and a half and now trade for themselves.
This new group of retail and small institutional traders and investors have collectively done better, not worse, than the average Hedge Fund the past two years or more.
Some have done much, much better.
So who is the "Smart Money" and who is the "Not That Smart, But Far More Arrogant?"
Anybody gor a photo link to Cramer's appearance during the 2008/9 debacle.
I remember him looking like a corpse with bad make up up back then.
A refresher look would be nice.Or maybe a dartboard backdrop..
http://www.youtube.com/watch?v=HPc16cuQJR0
http://www.youtube.com/watch?v=Zz4pv2OVGFk
http://www.youtube.com/watch?v=SWksEJQEYVU
The only real question is how long can Central Banks buy Government Bonds and private bad loans at par ? If the answer is to infinity, then party on. If not, then what happens if the entire planet pulls an Argentina ?
The charts I look at are starting to scare me. As a devout permabear they should make me happy but I'm starting to wonder if I'm going to be happy with what I get when/if I get what I want. Years of manipulation have left the market with very few supports. When it starts to fall where will they stop it? The NASDAQ for instance has some support at 2400 or so but that's not very far down. A medium correction would take that out and then what? I only see 1200. They will have to stop a major correction without the help of trendline support and the last time that happened was 2009. Well a lot of us have been hoping and praying for end to the Ponzi...
Lotsa articles about a top on ZH lately.