Investor Sentiment: It's too Early to "BTFD"

thetechnicaltake's picture

In the absence of extreme bearish sentiment (i.e., bull signal) developing, it is unlikely that any upward price move in the major equity indices will last more than a couple of days and it is likely that selling will resume once those prices move towards the recent cyclical highs. Having more bears than bulls at the start of a rally provides short covering fuel and buyers on the sidelines willing to chase prices higher. These conditions don't exist even in the shortest of time frames. If you "buy the f---ing dip" make sure you "sell the f---ing rip".

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.

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: "A 113% week-over-week increase in the number of insider buyers offset a 66% week-over-week increase in the number insider sellers and resulted in a neutral sentiment reading with some very positive elements. For starters, there was increasingly bullish sentiment within the Russell 2000, which has traditionally been the more predictive group of insiders as compared to the S&P 500, whose insiders displayed a rather typical sell bias last week (the latter group's constituents are more liberal with stock-based compensation). Market-wide, there was a strong number of Net Buy Inflections, something that was reflected by the high number of actionable buy transactions within the Technology and Industrial Goods sectors. There was also a positive turn in the Financial sector, where a rush of buying at Regional Banks and S&Ls (in particular in the Northeast and Mid-Atlantic regions) pushed sentiment to its best level of the calendar year. While there has been plenty of selling thus far this quarter, we're impressed and encouraged by the actionable buying we're seeing on a company-level and by the recent activity within the Russell 2000."

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 69.34%. 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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I should be working's picture

I am going to point out that while sentiment now is higher than at market bottoms, sentiment in early April was lower than at previous market tops.

All of this is irrelevant anyway, because news from Europe is now driving the market. Unless you can predict whether the next news from Europe will be a positive or a negative you cannot predict the market direction. I don't know when, but the can will be kicked, you can count on that at the end of the day...

disabledvet's picture

eh. Need to start with the economic growth numbers (anemic...but still not contractionary...though clearly "depressionary for as far as the eye can see") and go from there. price wars are starting to break out. assumptions vis a vis the collapse of Europe are coming in and "they're all's a lot worse." Real estate is double dipping. State budgets are blowing out across the entirety of the USA. Treasuries are at nose bleed valuations. Commodities including gold and silver are as dead as the American consumer. The bulk of major sporting events are being "fixed" by the media. Yada, yada, yada. The Fed as a consequence is handing out "free interest rates" NOT free money. For those that can grow an economy there is money to be made...that's equities as "you can't solve the problem of debt with more debt" as is so well said here. I must say in this context i disagree with Warren Buffet...debt problems can be solved with cash as well. In other words "you pay it off with your income and savings." Just ask Ford Motor Company. Not a good time for banking or insurance of course. Low to zero interest rates and low to zero growth never are. "Government, government everywhere." All paying current beneficiaries with borrowed money i might add.

q99x2's picture

I like the 50 day 90 day crossovers. And I like these indicators too.