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Investor Sentiment: Are We Clear?

thetechnicaltake's picture




 

Let’s be clear.   There are very few positives when considering the economic landscape.  It is hard to see what the catalyst might be that could change the fortunes of the economy and the stock market.  The old tricks, like we are going to spend more money we don’t have (i.e., the American Jobs Bill), don’t seem to be wetting the speculative appetites of investors.  The market sold off hard the day after President Obama announced more of the same.

Let’s also be clear that prices remain above support levels carved out 2 weeks ago, and in my opinion, this bounce, which has yet to morph into a rally, isn’t dead until we get a weekly close below those support levels.  So for now it is “game on” and the ball is in the bull’s court.  For the SP500, that key pivot or level stands at 1133.65.

Let’s also be very clear one more time that prices on the major indices have pulled back to those support levels, and in my opinion this represents another buying opportunity for those aggressive investors looking to get long.  But is it really aggressive?  Well if you consider the recent price action and the lack of meaningful catalysts, I would probably say it is aggressive or speculative.  On the other hand, with prices so close to support levels, your risk is lowered as you are buying against that level where you should be cutting your losses.   Any weekly close below support levels should be reason enough to defend capital vigorously.

And lastly, let’s be really super clear, this is a bear market.  (I made the “call” August 9).  The current trade set up is a counter trend within a bear market.  This is for aggressive traders.  Research that I have shown in this article shows that if an investor did absolutely nothing — i.e., sat on their hands and did no trading  — until the next buy signal, the most likely scenario is that they would be giving up no more than 5% in gains.  In other words, looking to catch a bottom isn’t really necessary for outperforming the market.  What is necessary is protecting your capital vigorously!!

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 extreme bearish sentiment, and this is  a bull signal.

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:  “The short trading week couldn’t mask the fact that sentiment amongst insiders has turned neutral. Sellers outnumbered buyers for the first time in five weeks, taking a 3-to-2 advantage when Financials – where there’s an inherent buy bias – are removed from the equation. The Russell 2000 still flashed some buy signals, but the S&P 500 moved to neutral and insiders outside of those indices had a decided sell bias. Not surprising, there wasn’t a lot of conviction on either side of the argument.” 

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 indicatoris 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 46.51%.  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

Let me also remind readers that we are offering a 1 month FREE  TRIAL to our Premium Content service, which focuses on daily market sentiment and the Rydex asset data.  This is excellent data based upon real assets not opinions!  We have a new 1-click sign up process!  Credit cards are not required.  And oh, prices are going up in October.

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Wed, 09/14/2011 - 03:02 | 1666815 chinawholesaler
chinawholesaler's picture

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Mon, 09/12/2011 - 07:18 | 1658848 Ruffcut
Ruffcut's picture

With the vix this high, any rally is a shit rally. Whipsaw conditions rule the day. If volitility settles, then growth or rally can commernce.

To invest in clusterfucks of this nature, is dangerous and down right foolish. The bottom will be picked for you and you'll never get it. The goldman ballsachs are having too much fun right now.

Mon, 09/12/2011 - 02:41 | 1658674 Grand Supercycle
Grand Supercycle's picture

My long term indicators continue to warn of significant USD strength and AUD / NZD / EUR etc weakness and these signals have increased since 2009.

Unfortunately the March 2009 equity lows eventually will be breached.

Updated SP500 monthly chart at blog.

http://stockmarket618.wordpress.com

Mon, 09/12/2011 - 06:35 | 1658830 disabledvet
disabledvet's picture

definitely agree on US dollar strength being upon us. We've had nothing but broad based weakness going on a decade now and "the chickens are coming home to roost." Not sure what it means to "the market" because if Europe collapses that basically is another form of "pricing power" as it takes out competition. Indeed it could create corporate aggregations that simply put would be mind-bogglingly huge. And profitable. think banking/drugs/oil. and that's just for starters. on the flip side are state and local budget blow-ups causing "greek like events" all over the place.

Mon, 09/12/2011 - 02:13 | 1658655 thunderchief
thunderchief's picture

This week will be an extravagent run up to the fed meeting.  The dollar will strengthen, Europe will be on its knees, equities will come down, the sky is falling. 

The Bernanke will be able to do what he wants.  It won't be a QEIII anouncement IMO, but many Mini QE's.  Zero interest rates for two years and 1 Trillion in newly minted debt each year is a start.

Get ready for a Korean style meal of many delicious Mini QE's, and remember, just as when eating at a good authentic Korean Resturaunt, Side dish refills are always free!

Mon, 09/12/2011 - 06:37 | 1658832 disabledvet
disabledvet's picture

"yield hungry investors have their dicks chopped off and put in their mouths." you forgot that part.

Mon, 09/12/2011 - 02:32 | 1658668 jeff montanye
jeff montanye's picture

bernanke is impotent: http://www.hussmanfunds.com/wmc/wmc110912.htm  

in addition, it would be instructive if technical take would show a longer chart, not just the final waterfall decline of november '08 and the double bottom with the bear market rally.  

the "dumb money" is often bearish at the first break off the top (say oct '07) and it is right in a long run sense.  yes the market recovers a bit, of course not to the prior top, but it was right to sell and avoid the horrific decline to come.  of course the d.m. will always miss the bottom (because it is "dumb") but it gets bullish after the first strong rally.  d.m. is a poor trader, hence is useful for trading, but d.m. is not wrong at the first big break/rally in a major market cycle from a strategic perspective.

Mon, 09/12/2011 - 00:55 | 1658585 caerus
caerus's picture

short this shit and tell your grandkids

Mon, 09/12/2011 - 06:37 | 1658833 disabledvet
disabledvet's picture

go long the good and tell God.

Mon, 09/12/2011 - 00:26 | 1658538 DeadFred
DeadFred's picture

The guy has a point, with this many bears around They will pull off a rally if it is humanly (or robotically possible). Things may be out of their control though. His approach works until it doesn't work. But only 5% downside risk? LOL

Mon, 09/12/2011 - 11:18 | 1659692 thetechnicaltake
thetechnicaltake's picture

fred:

you interpretated my statement wrong; there isn't a 5% downside risk; I stated that it isn't necessary to buy into a counter trend rally to outperform the market; if you don't do anything, you would only give up maybe at best no more than 5% in gains

Mon, 09/12/2011 - 00:56 | 1658588 IQ 145
IQ 145's picture

The risk is whatever you wish it to be; this is why God created Stop-Loss Orders.

Mon, 09/12/2011 - 00:10 | 1658513 Dingleberry
Dingleberry's picture

Asia is still crashing, bitches......right on cue. Europe next in a few hours.

Mon, 09/12/2011 - 01:03 | 1658594 Freddie
Freddie's picture

I wonder if China is finally starting to crash aka the BIG bubble is finally bursting.  They will try to prop it up like The Bernank and the HFTs.

Mon, 09/12/2011 - 00:09 | 1658509 radish juice
radish juice's picture

If you are confidently analyzing 5% swings, have you considered the possibility of your newsletter being esteemed member of the dumb money crowd you alluded to in the blog above?

 

"The current trade set up is a counter trend within a bear market.  This is for aggressive traders.  Research that I have shown in this article shows that if an investor did absolutely nothing — i.e., sat on their hands and did no trading  — until the next buy signal, the most likely scenario is that they would be giving up no more than 5% in gains.  In other words, looking to catch a bottom isn’t really necessary for outperforming the market.  What is necessary is protecting your capital vigorously!!"

Mon, 09/12/2011 - 00:01 | 1658491 rocker
rocker's picture

Buy, Buy, Buy.   LOL        Just Kidding.      Who Cares.   The HFTs own the market.

Mon, 09/12/2011 - 00:54 | 1658584 IQ 145
IQ 145's picture

"Data based on real assets" how interesting. there is data, and non data; eg. errors. and there are, to be sure, assets. but there is no data based on assets. This is not encouraging. The statement that the market will be a bull market until it isn't is correct. It's significantly off the recent lows, the bottom is in; and pessimism is the new national pastime; the reflex rally will continue.

Mon, 09/12/2011 - 00:43 | 1658568 Lionhead
Lionhead's picture

Why 'buy' when the FED has the market cornered?  We all know when someone has a corner going what the results will be. ZH has covered many of the 'corner panics' recently. Bon Chance buyers, you may find you have unlimited risk if the FED blows up someday. Plan your counter-party risk in advance of any purchases. Call it the TBTF trade. ;)

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