Investor Sentiment: A Gift

thetechnicaltake's picture

In last week's "gift" to investors, the SP500 gained 3.5% making up all of the losses that it had sustained for the month of November. I am sure that more than one investor is wondering: Why ever sell? Such is our markets where investors have been conditioned that they will not experience the pain of deep (any?) losses for any length of time. Oh well. Yet in a curious development and despite the higher prices, investors turned bearish and to an extreme degree. This should provide support or a floor to prices going forward.

How far will prices advance? The rubber band is far from being stretched too tight as there is little consensus amongst the various sentiment indicators. Or to put it in other words, a market that continually bails out investors or fails to clear out the weak hands is prone to failure. The bounce will probably be playable, but to this observer, these are the kinds of patterns that are consistent with market tops.


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 in extreme territory. Two consecutive weeks of bearish readings will become a bullish signal.

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 sentiment has improved, moving from a Slight Sell Bias to Neutral. The change coincides with the triggering of Industry Buy Inflections - our strongest quantitative indicator - within the Russell 2000 and Energy and Financial sectors."

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 61.76%. 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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NEOSERF's picture

Would agree that everything will tend to go up because we do believe that any pullback is a BTFD opportunity because the gov will ALWAYS step in with a comment or printing press.  Investors tend to be optimistic and lastly volume is so low that I would guess this just keeps melting up until something real happens in Europe.  Reality is no defaults have really been taken there, no secessions have happened, no real rioting has happened, German taxpayers haven't felt any pain....when something really serious happens then we will see the market react but it is just as likely that Rajoy takes a bailout or that they announce the ECB is the new Fed and will spread money from planes which will create the mother of all short covering as it is that Credit Agricole fails (and even if it does, France, Germany and the EU jump in to save it ala Bankia and others)...wonderful Neverland we all live in these days...until Hurricane Monti hits

ATG's picture

Prop desks buying calls again.

One of these days Alice:

Bahamas's picture

It must be nice to have some insider information and profit from it. The thing is:

" it is very easy to make a lot of money, if you already have millions"

Sudden Debt's picture

I'm confident that if you pull my finger, you won't be able to smell the roses anymore...


Debeachesand Jerseyshores's picture

Such "pretty charts">>> such "pretty bullshit"...

new game's picture

ten fucking years from now, same fucking post would be relavant...

suckers fool game; like vegass...

a sucker was just born- is that you?

so you think you can beat a rigged bot nano second trader with pre-bid info pre.

ha, hang around to be astonished by how many smart finance idiots, just like you, the same ole days...

everybody (esspecially in this instant age of knowledge)is a fucking know-it-all.

narcissism gone nutso!

lamont cranston's picture

Welcome to "The New Normal", where Pravda, yes - Pravda, trashes Communism and says "Obama was elected by illiterates". And it's always sunny in TBTF Land. 

TraderTimm's picture

I'm sorry my friend, but due to HFT and Fed interference, technicals don't make much sense in the 'open' market.

The only haven where they do is the daily BTC/USD charts. But then, it isn't swamped with HFT bots and idiotic government meddling.

Dead Canary's picture

"Buy low, sell high."

I invented it. You can use it but if you make any money, you owe me royalties.