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Investor Sentiment: An Important Juncture

thetechnicaltake's picture




 

There is a sense of incredulousness regarding the recent price action. The market seems to levitate day in and day out despite the news. Dips are limited to 15 minutes of intra-day action. Volume? We don't need no stinking volume. From this observer's vantage point, it just doesn't smell right, but who am I to argue with the market? Since the low on October 4, the SP500 has traveled 20%. From those same lows to the end of October, the SP500 traveled 16.67%. Since November 1 to Friday's close, the SP500 has earned 2.9%, which annualizes to about 15%. This is what one would expect from the price cycle as the best gains occur when investors are bearish and then the gains become a bit more begrudgingly. Of course, that is all in the past. The question everyone wants the answer to is "what's next?".

With the "dumb money" indicator approaching bullish extremes, the market is at the juncture where there are really only two outcomes. One, the market rolls over as the overbought and overbullish conditions lead to a correction. Or in option two, the market just continues to levitate higher as overbought becomes more overbought, and this multi-week rally morphs into a multi-month rally. Not particularly insightful, but in the current market environment, where you need to suspend any kind of common sense or logic, that is about the best I can do. Somewhere in here and over the next couple of weeks, we should have a resolution to the question of "what's next?".

When it comes to equities, our portfolios are positioned bearishly, yet, we have our "line in the sand". I have stated for weeks that the only way we will know that the Fed and ECB have averted a "crisis" -- and you can pick from several percolating around the globe --is by having higher prices. A monthly close over the simple 10 month moving average by the SP500 would be one such indicator.

 

 

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, but it is nearing extremes in 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: "With the vast majority of insiders locked-up and prohibited from trading until after their companies announce Q4'11 earnings, trading volume was extremely - and not unexpectedly - low this past week. Volume should remain thin through the end of the month and then ramp up dramatically as earnings season gets started."

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 63.41%. 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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Sun, 01/22/2012 - 22:06 | 2087397 arg
arg's picture

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Mon, 01/16/2012 - 21:44 | 2069882 ozziindaus
ozziindaus's picture

".....groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors......"

Will somebody please break the news to these guys.

You're totally right. Public sentiment drives the market and not vise versa. While I'm at it, I'll drop another Prechterism, "the Market is there to fool you" and he's right. The dumb money exists as a liquidity injection. Same goes for 401K's and the rest of those structured mutual fund frauds. 

Mon, 01/16/2012 - 17:25 | 2069429 Rainman
Rainman's picture

When regulators finally start pimping for the clearing houses, something must be ready to blow.

http://www.reuters.com/article/2012/01/16/us-clearing-default-idUSTRE80F0WW20120116

Mon, 01/16/2012 - 23:35 | 2070086 StychoKiller
StychoKiller's picture

From the link:

"In an ideal world there would be a single global, not for profit, CCP backed by all central banks," said Orchard.


Mon, 01/16/2012 - 17:31 | 2069437 ItsNotYouItsMe
ItsNotYouItsMe's picture

NICE!  This shell game just keeps getting better and better!  Until the retail investors chance of success is .000001%, the game will continue.

$600 Trillion ... I don't think that's enough leverage; I think we need 50 or 60 Quadrillion, then we could see some REAL returns.

Mon, 01/16/2012 - 17:19 | 2069419 ItsNotYouItsMe
ItsNotYouItsMe's picture

Short Interest is reported twice a month and so there's no telling whats truly short (other than getting "no short shares available" on short orders in multiple accounts) 

The Fed buys everything in site, off balance sheet, so there's no telling how much is truly long. 

They've got it hidden on both sides ... great gig if you can get it!

It's an awesome shell game these days :)

Mon, 01/16/2012 - 17:02 | 2069392 Stuck on Zero
Stuck on Zero's picture

The Feds can't let the stock market go.  1000 retirement plans would sink and the Feds would spend more to bail them out than to keep the market at higher levels to begin with.  At least, that is the wishful thinking.

Mon, 01/16/2012 - 17:23 | 2069426 ItsNotYouItsMe
ItsNotYouItsMe's picture

ABSOLUTELY!  THey're ALL IN and fully engaged for all the wrong reasons.  Besides, if the entire market is worth $60 Trillion or so ... and the US Fed Deficit is almost $20 Trillion ... put that in perspective.

Buying up $40 Trillion of the US Market, off balance sheet by the Fed is nothing.  They just buy it up, sit on it, and let the remaining shares fight their way higher on lower and lower volume. 

It's brilliant!!

Mon, 01/16/2012 - 16:40 | 2069354 falun bong
falun bong's picture

Yah but what if everybody and everything is bad and horrible at the same time? Wouldn't "a tiny bit less awful" do better than "unspeakably hideous"?

Mon, 01/16/2012 - 16:39 | 2069351 paintman
paintman's picture

As long as government plows 10% of GDP in borrowed money back into the economy, we will see a 1% growth rate and everything is fine.

Mon, 01/16/2012 - 16:26 | 2069326 infiniti
infiniti's picture

Market sentiment is over-bullish but that condition doesn't lead to an immediate decline. Similar time periods were April 2010, where the market climbed every day on no volume until the massive flash crash occurred. This is also similar to December/January of 2010/11, where the market was oblivious to bad news until the Japan earthquake, but it quickly rallied back. It took 7 months to get your decline, but it was a doozy.

Mon, 01/16/2012 - 16:23 | 2069316 resurger
resurger's picture

Am preparing for the Bear Raid by the end of Jan, hop in!

Mon, 01/16/2012 - 16:11 | 2069299 Freddie
Freddie's picture

Somebody please pimp Eddie Lampert's Sears Holdings aka bag of sh*t.

Mon, 01/16/2012 - 15:43 | 2069246 OutLookingIn
OutLookingIn's picture

Its been said many time. many ways;

'There are no markets anymore. Just interventions.

What purports to pass as a market, is nothing more than a smoke screen reflected in a mirror.

Mon, 01/16/2012 - 15:04 | 2069135 apberusdisvet
apberusdisvet's picture

EFSF just downgraded; the waterfall continues.

Mon, 01/16/2012 - 15:53 | 2069235 Zero Govt
Zero Govt's picture

you mean in the delusional Goldfish bowl of politics and Credit Ratings Agencies the Eurozone Financial Suicide Fund has been downgraded (from almost serious?)

out here on Planet Reality it's been a pitiful and hilarious joke since Day 1

so 1 year behind the curve the CRA's are sloooowly catching up with the real world... give those crones a medal

Mon, 01/16/2012 - 14:59 | 2069118 Reese Bobby
Reese Bobby's picture

What is the probability CB's are buying equities?  My over/under is 75%.

Mon, 01/16/2012 - 14:58 | 2069117 LawsofPhysics
LawsofPhysics's picture

Oh, if only technicals mattered anymore.

Mon, 01/16/2012 - 21:54 | 2069917 ozziindaus
ozziindaus's picture

When Technical Analysis is used by enough cock heads, they become self fulfilling prophecies but don't tell that to the cock heads, they think they see patterns nobody else sees. 

Mon, 01/16/2012 - 14:38 | 2069039 Zero Govt
Zero Govt's picture

Overbought and Overconfident is Bearish

Oversold and Suicidal is Bullish

Got it

Now all we need is a Benny Blowing False Bubbles indicator that sticks a spanner in the works of the real world/market working correctly

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