Investor Sentiment: A Sell Signal is Upon Us

thetechnicaltake's picture

For weeks now, I have been using phrases in these weekly articles on sentiment like "the best, most accelerated gains are behind us" and "we are closer to the end then the beginning". When we look at the charts, the SP500 has been essentially flat for the past 8 weeks, so every now and then, I guess I can get it right. If you have been a buyer over this time period, you most likely will find your investment underwater. In other words, there are a lot of investors who have bought high with the expectation of selling higher and who have bought the Wall Street nonsense that this is an investing opportunity of a lifetime. NOT! The "dumb money" indicator has dropped below the upper trading band (see figure 1, green arrow), and the best time to sell is usually 1 week after this signal. There are other scenarios that could develop, such as the emergence of the dip buyers leading to excessive speculation, but the most likely scenario and until further notice, I would be a seller at higher prices. The gas appears to be coming out of this market.

As the current market environment has been compared to 2011, it is noteworthy that last year's sell signal occurred on March 11. 7 weeks later the market made a marginal new high in another flurry of speculation. It took the market another quarter before it actually cratered sustaining a 20% loss over 4 weeks. In general, the next best buy signal will occur when investor sentiment turns bearish.


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 now neutral. The data shows that the optimal sign to sell is 1 week after the indicator crosses below the upper trading band. But these are optimal scenarios, and I should caution that optimal and stock market are rarely spoken of in the same sentence. The market is just too unpredictable. Who saw the May, 2010 "flash crash" or the 20% drop over 3 weeks in 2011 coming? If you hang around too long, you could be one of those casualties. Alas, there are no right answers or guarantees. These are just signposts that help us better understand the price action.

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 activity across the market was very limited last week as most companies have closed trading windows for insiders until after their Q1'12 earnings announcement. Trading volume will remain very light for the next two weeks and will increase as earnings season kicks into gear."

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 66.19%. This is the second week in a row that the indicator has turned down week over week. 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

TheTechnicalTake offers a FREE e-newsletter:

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
pebblewriter's picture

"The market is just too unpredictable. Who saw the May, 2010 "flash crash" or the 20% drop over 3 weeks in 2011 coming?"


Umm...some of us actually did.

orangegeek's picture

All you elliott wavers have been forecasting this slide for some time.  Primary Wave 3 down or so the saying goes.


If you check out the daily's and weekly's leading up to this past week, you can see for yourself the cracks beginning to occur.

skepticCarl's picture

The dumb money indicator of Figure 1 is good at identifying bottoms, but pretty ambiguous about tops.  But that's because tops tend to be rounded at spread over time, as buyers (and HFT algo's) run out of money or buying interest over a long period.  The spike bottoms reflect the quick response of fear changing to greed, and are more easily recognized.

The roll-over in foreign markets (allmost all had hit their mid-term highs months ago and are below their 50 day moving averages) is another indicator of a mid term top for the U.S. market.

So, I agree with you technical trader, in that while we may have not seen the nominal top in the indexes,  the intermediate upside is quite limited at this point, and rallies should be sold.

CURWAR2012's picture

Cash is a prince, metals are king, stocks are the servant poor.

Bindar Dundat's picture

Cash is not the Prince it is fools gold.   Think long term good stocks and gold.

RobertMugabe's picture

And with what will you purchase good stocks and gold with? Oh right, CASH dumbass! If you don't have cash when the bottom arrives because all of your wealth is already tied up in gold and "good stocks", you wont have the means to back up the truck when the time is right. Continually amazed at how very few people understand this basic principal

q99x2's picture

IBD called it a week ago. You're late dude.

Sabibaby's picture

It seems like the downslope is steeper than the upslope -Mr. Ambiguous

banksterhater's picture

S&P Crestmont or Shiller p/e is 21, profits peaked 3 months ago, anyone still in is wealthy or a moron. Look at weekly AAPL break on big distribution. Smart money is already gone. It's over, get out.;


steve from virginia's picture


What happens to stocks, Treasuries and the dollar next week depends on what happens in Spain.

They have more bond sales coming up, a failed Spanish bond auction will be good for US stocks (runaway from the euroland economy).

hettygreen's picture

And no one who is already fully invested in the US is also maybe a tad overleveraged in Spain or in someone else who is overleveraged in Spain? Economic incest is rampant. A three year suspension of reality is about long enough. Sooner or later the dominoes have to fall.


Grand Supercycle's picture

The Big Picture Wile E. Coyote Equity Top.

Prepare for a substantial USD rally.