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Investor Sentiment: Are These the Makings of a Sustainable Rally?

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We start the new year like we ended the old year: with a mixed sentiment picture. The Rydex market timer is extremely bullish, and this is a bear signal. The "dumb money" indicator is neutral and company insiders are as well. Overall, my interpretation is bearish. Sustainable price moves usually start when there are too many bears, and it is short covering that is the fuel that sparks a price rise. After the short covering subsides, sustainable price moves are typically heralded by having too many bulls willing to chase prices higher. Neither of these extreme conditions are currently present, and it is difficult to see the market embark on a sustainable price move in their absence. Lower prices would bring out more bears and this would be a precursor to a tradeble, sustainable rally. Higher prices should be supported by increasing number of bulls, and this would be a signal that a sustainable rally, that everyone so desperately wants, is unfolding. As stated above, I am betting that we will see lower prices before higher as there are few bears (i.e., no short covering) and as the time for the bulls to have taken the reigns of this market have long since past.

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 shows neutral sentiment.

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: "Sentiment remained in Neutral territory this past week. Sellers did show a bit more conviction than buyers, but with the year closing there was, no doubt, some tax-related selling. Volume fell from a week earlier, the result of the holiday and end-of-quarter lock-ups coming into play."

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 59.84%. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops.

Figure 3. Rydex Total Bull v. Total Bear/ weekly

 

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Sat, 01/14/2012 - 11:42 | 2064516 sara29
sara29's picture

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Tue, 01/03/2012 - 10:21 | 2028463 DavidC
DavidC's picture

"...the time for the bulls to have taken the reigns of this market..."

They are REINS, NOT REIGNS!

DavidC

Tue, 01/03/2012 - 04:59 | 2028108 ebworthen
ebworthen's picture

Imagine if you gave people the choice to take their money in retirement accounts now tax free.

Bet the outlfows would be astounding.

The only thing keeping the individual money in the markets are tax and withdrawal penalties, and just you wait, those will be ramped up very quickly in the next four years, Republicrats or Demicans in power.

Tue, 01/03/2012 - 00:09 | 2027800 Westcoastliberal
Westcoastliberal's picture

IMHO the market will go sideways until they torch off the war with Iran (aka WWIII).  Then Gold will soar and we'll have that long-awaited 1000 Dow.  Of course this will only be noted by those actually at the exchange as electricity will be a thing of the past as a result of the EMP courtesy of the Iranian Navy.

 

If you agree with me that collapse is becoming unavoidable, don't despair, prepare! http://www.collapsenet.com/262.html

Tue, 01/03/2012 - 03:20 | 2028052 bill1102inf
bill1102inf's picture

just like Iraq/Afghanistan/Pakistan was  WWIII right?  Iran.. pfffft

Mon, 01/02/2012 - 23:02 | 2027621 Georgesblog
Georgesblog's picture

If investor sentiment could solve the debt problem, then that would be something worth the confidence that a rally seeks. Since sentiment can't defy gravity or the debt load, there is nothing upward that is sustainable. Of course in the short attention span of the large institutions, a few seconds might be considered sustainable. That might work for recording a profit by the end of the day, but it doesn't work, in the real world. The price of Powerball tickets is going to double. Is anyone long on those?

http://georgesblogforum.wordpress.com/2011/11/02/the-daily-climb-2/

Tue, 01/03/2012 - 02:18 | 2027989 onarga74
onarga74's picture

The Powerball move was brilliant...along the lines of great decisionmaking at Netflix, BofA, et al

Mon, 01/02/2012 - 22:53 | 2027596 dcb
dcb's picture

I get next potential short at about 1/12/11

Tue, 01/03/2012 - 02:04 | 2027975 DeadFred
DeadFred's picture

The constricting range the market is trading in can't go much longer than your date and is likely to break big when it does. You're taking a chance by assuming the break won't be upward. All that needs to happen is for Uncle Ben to plant a story in the WSJ by Jon Hilsenrath saying he's going to start buying MBSs again and the ramp will rip the faces off the shorts. Don't assume something like that won't happen. The fact that the system is doomed doesn't mean it will die very soon. There is a lot of cash on the sidelines ready to hop on a fantasy rally. Fundamentals mean very little in this market. Take care and don't let Goldman and friends eat your liver.

Mon, 01/02/2012 - 22:51 | 2027586 fourchan
fourchan's picture

the party is over?

Mon, 01/02/2012 - 23:17 | 2027656 SmoothCoolSmoke
SmoothCoolSmoke's picture

If the party is over , you won't be apble to tell Tuesday morning.  Loks like DOW up 200 by 10 am.

Tue, 01/03/2012 - 03:22 | 2028054 bill1102inf
bill1102inf's picture

ambien

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