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Weekly Sentiment Report: Mixed Signals

thetechnicaltake's picture





 

The $VIX is at a level that has produced selling over the past year, but the indicator we use to capture that dynamic suggests higher prices. The Rydex indicators are starting to roll over from an extreme bullish level. On the other hand, the "smart money" is bullish at least on a relative basis. Maybe these mixed signals are just a sign of a market that needs to consolidate the gains from the past year.

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Yes, I wish I knew or had a crystal ball, but sometimes (maybe a lot of the time) the indicators don't line up. Our default mode is to defer to our "dumb money" indicator (shown in figure 2). This is the indicator we use in our equity model, and the model remains bullish, and will likely remain so for another 2 weeks or more. We have been bullish for 18 weeks now when we became bullish during a period of extreme investor bearishness, and it is our expectation that this trade should last on average 15 weeks. So we are in the late stages of the rally. The best, most accelerated gains typically occur in the beginning of the trade. Just when investors typically get the all clear, the trend will flatten out. Maybe this is the message of all these mixed signals. Our plan is to become sellers of equities when investor sentiment unwinds, but we are not at that point. As a reminder, we have moved our stop loss up to SP500 1706.92.

Figure 3 (below) shows the "smart money" and this is currently at a level where buying has taken place over the past year. Mind you, the value is still negative suggesting that there is no real buying and that the pace of selling has just slowed. Nonetheless, in a market that only knows one direction -- up! --, this is the kind of levels that are associated with a rise in asset prices. Once again, these aren't absolute levels of buying but only relative to the past year.

Figure 4 (below) is the Rydex Total Bull to Total Bear ratio and this is rolling over. If there is one group of market timers who actually have timed this market well over the past 4 years, it has been (oddly enough) the Rydex market timers. As figure 4 shows, they have become less bullish.

Figure 6 is an indicator that looks at the $VIX and with the indicator pointing higher, we should expect higher prices. But hold on a second. Over the past year when the $VIX hit a level of 12, this produced selling. The $VIX closed the week at 12.14.

Folks, I wish I had the answers for you this week. I don't. The signals are mixed. Don't get mad at me. I just interpret the tea leaves. You should have been around 18 weeks ago when I made the bullish call. Now you are left wondering "should I jump in?"

#800000;">The Sentimeter

Figure 1 is our composite sentiment indicator. This is the data behind the “Sentimeter". This is our most comprehensive equity market sentiment indicator, and it is constructed from 10 different variables that assess investor sentiment and behavior. It utilizes opinion data (i.e., Investors Intelligence) as well as asset data and money flows (i.e., Rydex and insider buying). The indicator goes back to 2004. (Editor’s note: Subscribers to the TacticalBeta Gold Service have this data available for download.) This composite sentiment indicator moved to its most extreme position 10 weeks ago, and prior extremes since the 2009 are noted with the pink vertical bars. The March, 2010, February, 2011, and February, 2012 signals were spot on — warning of a market top. The November, 2010 and December, 2012 signals were failures in the sense that prices continued significantly higher. The current reading is neutral but heading towards bearish (as in too many bullish investors).

Figure 1. The Sentimeter

fig1.1.12.14

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#800000;">Dumb Money/ Smart Money

 The “Dumb Money” indicator (see figure 24) 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. The indicator shows that investors are extremely bullish.

Figure 2. The "Dumb Money"

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Figure 3 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 continues to move further into Neutral territory, away from a Sell Bias, as transactional volume continues a seasonal decline. With earnings season beginning in two weeks, most companies have closed trading windows, limiting the ability of insiders to transact non-10b5-1 purchases and sales."

Figure 3. InsiderScore “Entire Market” value/ weekly

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#800000;">Rydex Asset Data

Figure 4 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 78.74%. The indicator is crossing below the signal line. Similar signals from this past year are highlighted on the chart. 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 and 2012 with this indicator between 70% and 72%.

Figure 4. Rydex Total Bull v. Total Bear/ weekly

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The Rydex Buying Power indicator assesses the amount of money on the sidelines. It is “fuel” available for buying. This indicator assesses both non – committed money (i.e., assets in the money market fund) and committed money (i.e., assets in all of the bearish funds that could potentially wind up in bullish funds) as available money on the sidelines. Low indicator values suggest little money on the sidelines and are consistent with excessive bullishness (i.e., bear signals). High indicator values are consistent with increased buying power and are consistent excessive bearishness (i.e., bull signals). The current value of the indicator is at 33.22%. Values less than 40% are consistent with market tops.

Figure 5. Rydex Buying Power/ weekly

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#800000;">$VIX

Figure 6 is a weekly chart of the SP500. The indicator in the lower panel looks at the current value of the $VIX relative to past pivot points in the $VIX and trend lines formed by those pivot points. The indicator is turning higher suggesting that price will follow soon follow lower as well.

Figure 6. $VIX/ weekly

fig6.1.12.14

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Mon, 01/13/2014 - 14:22 | Link to Comment SAT 800
SAT 800's picture

Short the S&P500 from 1830.75; basis Mar. '14; in the money at present after a big rally this morning that made a double top, more or less, out of a previous high. ES, t he contract, cuurently at 1828; the futures market is bearish.

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