Investor Sentiment: Bulls Lose Enthusiasm

thetechnicaltake's picture

The "dumb money" indicator has become more neutral suggesting that the bulls have lost enthusiasm for this bull market. As can be seen in figure 1 (below), the indicator has dropped below the upper trading band (green arrow). From this perspective, the playbook becomes real simple. If the indicator moves back above the upper trading band, then investors are putting risk back on, and all in likelihood, this would represent the last gasp of speculation in an aging bull market. This would be worth playing for. The other option and the next best time to buy equities would be when there are too many bears (i.e., bull signal), and this occurs when the indicator drops below the lower trading band (red arrow). The best and most efficient way for this scenario to develop is by having lower prices. Period. With the indicator neutral, the bulls have lost their mojo and there is little edge.

As a reminder, the 2011 market top took over 6 months to develop. The SP500 traveled in a narrow 75 point range before dropping 20% over a 4 week perid. The top can best be described as a period of discussion. Is the economy sputtering? Will the European contagion effect the US economy? Will the fiscal cliff be realized? And of course, the #1 topic of discussion and the only one that matters: will there be QE3? This all sounds familiar.


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: "An Industry Buy Inflection, our strongest quantitative signal of positive sentiment, was triggered in the Russell 2000 last week as buyers outnumbered sellers for the first time since the final week of November 2011. It was the first time an Industry Buy Inflection was triggered since August 2011, when insiders bought at their most aggressive pace since the multi-year market bottom of March 2009. Qualitatively the activity within the Russell 2000 is similar to what we witnessed in June 2011 when an Industry Buy Inflection was also triggered."

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 65.34%. 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

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JohnKozac's picture

Shilling argues that much of this (corp earnings) is hot air. In fact, a closer look at industrial production and inventory paint a grim picture...


...he concludes, a new recession is inevitable:

The U.S. economy is overdue for a recession. I believe that it entered the down phase of the long cycle in 2000, and the five to seven years that remain in the age of deleveraging are part of this period of weak economic growth and more frequent recessions. History reveals an average business cycle length of 3.7 years in the down phase. The economy peaked in the fourth quarter of 2007, meaning the present cycle is long in the tooth.

Read more:




The Economic Fractalist's picture

The week of 23 April 2012 : The Millennium Equity and Commodity Crash

How the global macroeconomic debt-money-asset system works.

This week's crash devaluation is not grounded in animal spirits nor social psychology nor socionomics nor mass psychology.

This is a predictable deterministic time based event and an element of an optimal mathematical self organizing process of the global debt-money-asset system and the rules that govern possession of the system's assets. Ultimately a macroeconomic system critical load of bad debt undergoes inevitable and predictable default as defined by the time based quantum mathematical patterned behavior.

Saturation Macroeconomics is a mathematical science primarily defined by the system's critical mass of bad debt load. That bad debt load previously was used to produce an oversupply of overvalued assets. Asset valuation crashes occur and economic recessions occur qualitatively when too much has been borrowed, too much has been produced, and too much has been consumed. . The macroeconomic system is triply saturated with asset overvaluation, asset oversupply, and a system critical load of bad debt.

The financial industry whose primary product is leveraged credit and bad debt creation accentuates asset overvaluation within the system's asset valuation quantum time based cycles

The quantum process of patterned valuation growth and decay of composite equities and commodities and the system's hegemony countervailing larger asset class of debt reveal the status retrospectively, currently, and prospectively of the macroeconomic debt-money-asset system where money and more importantly and substantially debt represent very large elements of the system's total assets and summation wealth.

When inevitable bad debt default occurs, the system's numerator of surviving assets have a lower denominator valuation of total wealth.

In the United States over 50 of the 190 trillion dollar system's worth including land and real estate is represented by debt.

The time dependent quantum patterned behavior of the relative valuations of the system's countervailing timed based asset valuation curves is THE RELEVANT DATA needed to compositely have a global understanding of what has happened, what is happening, and what will happen. The asset valuation curves time based patterned behavior dwarfs the relevance of any GDP growth curve, unemployment curve, asset sales curves, wage growth curve, or accumulative US governmental debt curve.

None of these latter curves and the many other busy curves and data produced by classically trained economists are predictive of future economic activity, and ALL are dependent on the patterned behavior of the system's deterministic interlocking oppositional countervailing asset valuation curves.

The nonlinear quantum patterned behavior of the macroeconomic system's countervailing asset valuation curves elevates the entity of Saturation Macroeconomics to a science equivalent to physics and chemistry.

Understanding this paradigm shift concept and using the patterned science allows much easier decision making and clarity regarding global economic and fiscal policy.

Boilermaker's picture

How would you like to pay for 'premium content' for this shit?

Please tell me this is a zit faced teenager producing this in his parents basement.  This contributor is the worst on the site.

e2thex's picture

There are no Bulls or Bears. There's only Short-covering.