Investor Sentiment: Is This the End of the Road for the Rally?

thetechnicaltake's picture

The "dumb money" indicator has become extremely bullish (bear signal), and this is what one would expect with rising prices. The higher prices go the more bulls that are recruited. But is it the end of the road for the rally? Not necessarily so. In 1995, 2003, 2009, and Q4 2010/Q1 2011 we saw the phenomenon that I have dubbed "it takes bulls to make a bull market". It is a market characterized by rising prices and excessive bullishness. In the case of 1995, 2003, 2009, the excessive bullishness and multi-month rally seem to be warranted as the markets were bouncing back from steep losses or a prolong period of consolidation (1995). The Q4 2010/ Q1 2011 version of this phenomenon was a QE2 induced feeding frenzy. With investors taking their cues from the Federal Reserve and European Central Bank, the current market environment resembles Q4 2010/ Q1 2011. For now, we need to respect this dynamic as we could be witnessing another melt up. The bulls have the ball in their court and are on the cusp of turning this recent price move into a multi-month barn burner.

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 bullishness.

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: "Insider trading volume was seasonally thin last week, the result of most insiders being locked-up and prohibited from trading until after their companies' Q4'11 earnings announcements, as well as the market holiday."

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 65.09%. 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

TheTechnicalTake offers a FREE e-newsletter:

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
TheSilverJournal's picture

If $1T of MBS purchases is announced Wed. at 12:30, then the rally is not over. It actually seems like a perfect time to announce the new QE and create a further market rally because retail investors in the market are at their lows, while insitutional investors are at record lows for betting against the market, which means that it's at the perfect point for a market rally to put max pain on the little guy.

PaperBear's picture

With low volumes, what investor is in this stock market ? Not the retail invested, o one except for the HFTs.

LouisDega's picture

Investor Sentiment: Is This the End of the Road for the Rally? No

randomwalker's picture

Wait until the bears throw in the towel.

The Monkey's picture

What's your point? That we are off to the races due to almost zero short interest in the market, or, that it's about time for the bears to attack?

Extremely low short interest coupled with extreme bullish sentiment and paper thin volume is the professional bears perfect environment. The pros will let bulls walk as far out on the plank as possible. If the Fed wants to ramp the S&P 500 another 300 points, it's all good.

This is not a buyers market. A bear attack happens when really big money strategically shorts the market. When volume is very thin, prices can fall precipitously. For the retail investor, you have no way of knowing when or if an attack is coming. So when short interest falls to almost nothing on thin volume, get out.

steveo's picture

There are lots of PNP's (pro nuke pimps) out there talking complete garbage such as Solar PV costs 70 cents per kWH.

The Real Cost to Implement PV Solar Electric has dropped to 2.94 Cents per KWH !!!

The world has changed underneath their feet, they don't want to have to learn a new livelihood even they are killing us slowly and sometimes more quickly. More quickly if you unfortunate enough to have inhaled some of the plutonium hot particles that were launched in the jet stream when reactor 3 blew sky-high. Information on that is here:

In link below, here is the proof, an real life cost proposal, savings chart properly de-rated, and a long term savings chart.

Solar Electric is now 2.94 Cents per KWH.

randomwalker's picture

Load factor for solar is maybe 19% (Arizona) vs over 90% (2010 US avg)? Youre dreaming in technicolor mate!

AllThatGlitters's picture

The entire first paragraph tells us:

a) Dumb Money indicator is bearish (too much bullishness)

b) This indicator hasn't worked in the past for various reasons

c) This time, the market could keep melting up, despite the indicator, because the market looks like before when it didn't work

Then, we are treated to a series of charts that we were just told to discount / ignore?

The Monkey's picture

He did a nice job calling a buy at capitulation back in the fall. Nice gutsy call. But like I said, he's bullish biased IMO, so after his newsletters start to sound a bit like circular reasoning / wishful thinking, it might be wise to close positions. Guessing he he using a 20 day MA for his dumb money indicator, but the individual components are getting close to extremes.

Always interesting to see if you can time the top. My guess is that this guy will still be holding when the bears attack.

The Monkey's picture

The Technical Take guy has a pretty good track record with his calls, but tends to be bullish biased and can get caught flat footed when things are overbought. But, overall a pretty nice track record over the last year.

He recently called a secular end to the bond bull, which I think was pushing his luck. Stick with what you know.

Expecting prices to continue to melt up for a little while longer while we get a concerted effort to lift rates by shorting treasuries. Great time to stay on the sideline completely in cash.

ekm's picture

This is all shit. Neither fundamentals nor technicals matter any longer.

Before 2007, there was a market except for rare Plunge Protection Team interventions from 1987. Now, PPT is in the market probably weekly and HFT makes for 70% of trading. Remember, HFT guys DO NOT hold any stocks. Hence, when there is human volume, they get in the middle of the spread. When there is no human volume, they simply shut off and go home.

The Monkey's picture

There still is a market and it's called bonds. Buy equities and high yield on hard capitulations, move the returns into high quality long duration bonds when things look toppy, data looks good and folks start talking about a sustained recovery. Rinse, repeat.

Easiest market ever if you make the mental adjustment, and I'll bet this goes on for another decade.

My rules of thumb: Ubber quality is best buy at tops, lower quality is the best buy at the bottoms. Go long duration in all cases.

resurger's picture

Hey Monkey,

I really wish the markets go up in the next couple of weeks, because then it would reach very high levels and my shorts would be of a great value.

Lots of people are betting on a QEIII, well there has been shit loads of QE's and the markets up topping, so i am not expecting a QE3 to come without a fall, because 1 Trillion USD of free money to be pumped in the market by the holy squids will create hyperinflation and will cause the current tops to a new tops of an additional 15% or 10%.  so many suckers will be going all in. Gold will soar and oil and then wait for a big crash that we have not seen before (Gold & Silver will not crash)

those are my predictions :

1- Since Russia, PIMCO, China are dumping treasuries like crazy the last thing the Fed wants is to make a public QE (They make covert QE's)

2- They wills say that they wont print at this time, markets crash and then announce a QEIII (The stock market is already trading high at this time)

3- if good earning's are announced today and next week, the markets will be fine, so i dont see any reason for a QE

The Monkey's picture

Appreciate the feedback, but I am on the opposite side of the coin with respect to inflation. Core CPI in the US is trending steadily downward and there is not much left for the Fed to do. Deflation is in the cards.

The Fed cannot really hyperinflate. Open market purchases have a lot of downside, and even after exploding the balance sheet, core CPI is continuing it's long downward trend with a few bumps. The Fed will bumble around with the same approach until a leadership change is politically necessary. That moment may come sooner than later.

Deflation does not necessitate a fast moving crisis, but is does infer that investments of all stripes will increasingly be valued based on relative safety and yield for years to come.

Boilermaker's picture

Do people actually PAY this shit-for-brains this type of garbage?

g speed's picture

Technicals are not as intuitive as they were in past moves. Witness last weeks "Dow up" day with only one stock of thirty moving up (IBM). Volume is less that what would be needed to move the indexes which means almost no players. Price is divorced from value and price discovery is impossible. For trends to work you need buyers (or sellers) and that we ain't got, just HFT bidders. IMHO world equities markets are hollow. Fundimentals are fantasy because GAAP are adulterated and rating agencies sell to the highest bidder. The markets don't work because quite simply they are broke. 

DeadFred's picture

I'm becoming convinced that HFTs are producing a new truth to the old statement "This time is different". Time will tell, but if there is a concerted effort to drive volume down to give the algos more control I would expect the old reliable indicators to give a lot of false predictions. The HFT controllers don't care about retail but the day traders and hedge funds will have to go. Higher highs and lower lows.

The Monkey's picture

Maybe. Then again, paper thin volume is the hallmark of a secular bear market. Review the technical condition of Japan's rallies, some of which were huge, post twin real estate and stock bubble collapse.

arg's picture

Gabrielle pomegranate diet pills Giffords, who survived slim pomegranate a gunshot wound to the super slim head a year ago, said super slim diet pills Sunday she would step down super slim green lean body capsule from Congress this week, setting super slim pills off a political scramble in Arizona super slim pomegranate to fill her seat. In a super slim pomegranate diet pills video released on YouTube, the super slim pomegranate pills Democratic congresswoman said she would super slim pomegranate weight loss capsule resign because she had more work to do on her recovery.

Popo's picture

are you fucking kidding me?

e2thex's picture


The only thing that has driven this market, is still driving this market and will continue to drive this market is short-covering. 

This isn't 1987.


MFL8240's picture

The end of the dumb money rally is when the rest of the world wakes up to the fact that we are insolvent and our money is not worth the ink on it.  In time this will happen just takin longer than most would have thought,

Popo's picture

> "The end of the dumb money rally is when the rest of the world wakes up to the fact that we are insolvent and our money is not worth the ink on it."

However you slice it.  Bears (and I humbly include myself in that category) have been horribly (and frustratingly) wrong.  The ability of the powers-that-be to create booms when mathematically there shouldn't be any, is truly incredible.    All we can do is clap our hands and marvel at the combination of market manipulation, and follow-the-herd momentum.   Sure, we can keep saying,  "Yeah, but soon it's going to fall to pieces".  But with every day that goes by,  I'm afraid we're all looking dumber and dumber.  Can this b.s. be extended for another year? Two years?  Five years?  Ten years?   The painful answer to all of the above is:  Maybe.   

GeneMarchbanks's picture

'Can this b.s. be extended for another year? Two years?  Five years?  Ten years?   The painful answer to all of the above is:  Maybe.'

Except the only thing that is now clearly evident is that you have many turkeys that are loving the short term feed. Five years? You must be high. 

The trend is not your friend if you're in the west. The absolute perfect execution of the phasing out of the petro$ is now in its final stages, enjoy the big black bird.

Ghordius's picture

I had the same feeling in 2000/2001, though... The life of a perma bear can be miserable...

OT: Iceland wants to join the eurozone. Iceland. That one, yes...

GeneMarchbanks's picture

Regarding Iceland... well yeah... they see that battle lines are being drawn and the banking religion doesn't recognize sovereignty.

We'll all be OK in five years but our failures will have piled up even more and the destruction will probably be much more visible.

J 457's picture

Money is a form of exchange.  People prefer to buy and sell goods or services based upon paper money than chickens and crates of corn.  Until that changes, the curent monmey system will remain in tact, just not in the current form.

Spirit Of Truth's picture

The trouble began when those who "make money" realized they could use this priveleged power to usurp "value" from the production and trade of others.

"If the American people ever allow private banks to control the issue of their  currency, first by inflation, then by deflation, the banks…will deprive the people of  all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." – Thomas Jefferson in the debate over the Re-charter of the Bank Bill (1809)