For the first time since September 10, 2010, the “dumb money” indicator has turned bearish. The Rydex market timers continue to remain extremely bullish, and company insiders are non-committal. Consecutive weeks of investor bearishness as seen in the “dumb money” indicator is generally the best time to buy. Ideally, it would be nice to have additional confirming evidence such as buying from company insiders, and it is possible that lower prices might bring out the buyers especially as prices approach the November, 2010 highs and flirt with the 200 day moving average on the major indices. Regardless how it goes over the next couple of weeks, what is undeniable is this: 1) markets tend to bottom when there are too many bears; for example, since 1991 covering 40 unique instances, the SP500 bottomed 80% of the time with a reasonable risk (<6% draw down) to capital after two consecutive weeks of extreme bearish sentiment; and 2) failure of the market to bottom is a very ominous sign.
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 is extremely bearish.