Figure 1 shows a weekly chart of the SP500 with the composite sentiment indicator. This indicator 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).
Figure 1. SP500/ weekly
Currently, we are seeing bullish extremes (i.e., bear signals) in the "dumb money" indicator and in the Rydex asset data. As highlighted in our weekly look at investor sentiment [6], company insiders are increasing their selling. By the close of this week, it is expected that their selling will be extreme as well. Therefore, this composite sentiment indicator will have turned red in color indicating a strong headwind for higher and sustainable prices. The prior 4 extreme readings are noted on the chart. While prices did go higher in several cases, investors need to understand that we are nearer the end of the rally. Or at best, there might be a short term pullback in the works that lasts beyond 30 minutes.

