Weekly Sentiment Report: Headwinds

Somewhere along the way, I have heard the old stock market adage that the technicals break with the news. I am sure investors are sitting at home on this Sunday evening wondering how the events in Ukraine will play with the markets come Monday morning.


Despite the new all time highs in the SP500, it has been my contention for the past 3 weeks that we are in a NEUTRAL market environment. A neutral market environment implies that the markets will be ruled by overbought and oversold conditions, and after going straight up for the prior 2 weeks and becoming overbought, the markets seem to flatten out last week. We start this week with the SP500 futures opening down about 1%. I am sure the dip will be bought and anyone of a number of reasons will be given*. And it wouldn't surprise me to see the SP500 turn positive, so we can all breath a collective sigh of relief that the world is saved yet once again.

Three weeks ago we had a sell signal, and although the market is at new highs, our sell signal was not followed by a buy signal. What would constitute a buy signal? If investors had turned extremely bearish on equities following January's sell off, then we can say that this is a meaningful bottom that should lead to higher prices. Buyers short circuited January's sell off repeating a pattern that has been in place since 2012 where dips have been shallow as investors have anticipated Federal Reserve intervention, which seemed to be timed to limit investors' angst because the markets had pulled back almost 5%. Oh my gosh! In any case and as the data shows, a market that fails to periodically clear itself of the weak hands (i.e., those investors late to the rally) is a weak market, and with 1 buy signal in 2013 alone (when historically over 23 years of data there have been 2.5 per year), this market is vulnerable. In essence, one day doesn't make a market. By our measures, the upside should remain limited. In addition, to our neutral market environment, corporate insiders continue to be extremely bearish, and higher prices will only produce more selling leading to further bearish extreme readings in the "smart money" indicator (see figure 3 below).  

*Reasons why stock market is higher: 1) the USA is the cleanest shirt (safe haven) in the laundry 2) the Fed is ready to act 3) Europe won't be effected by the turmoil 4) this is a buying opportunity 5) the USA can fill the natural gas void  

The Sentimeter

Figure 1 is our composite sentiment indicator. This is the data behind the “Sentimeter". This is our most comprehensive equity market sentiment indicator, and it 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). The indicator goes back to 2004. (Editor’s note: Subscribers to the TacticalBeta Gold Service have this data available for download.) This composite sentiment indicator moved to its most extreme position 10 weeks ago, and prior extremes since the 2009 are noted with the pink vertical bars. The March, 2010, February, 2011, and February, 2012 signals were spot on — warning of a market top. The November, 2010 and December, 2012 signals were failures in the sense that prices continued significantly higher. The current reading is neutral.

Figure 1. The Sentimeter



Dumb Money/ Smart Money

The “Dumb Money” indicator (see figure 2) 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. The indicator shows that investors are NEUTRAL.

Figure 2. The "Dumb Money"


Figure 3 is a weekly chart of the SP500 with the InsiderScore “entire market” value in the lower panel. From the InsiderScore weekly report: “A market-wide Sell Bias continues to strengthen, however there is some seasonality to the selling as Q1 is when the majority of companies issue restricted stock awards and stock option grants. This results in elevated selling levels at many companies as insiders time their sales to coincide with award and grant vestings. Taking a more granular look at the activity; the Sell Bias is strongest within the S&P 500 and the Healthcare, Materials and Technology sectors. Insiders in the closely-watched Transportation and Semiconductor industries are each displaying Strong Sell Biases. While selling levels are increasing, they're not unusually high at the moment and, as we expressed earlier, there is a seasonal aspect to some of the selling."

Figure 3. InsiderScore “Entire Market” value/ weekly





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