This is the third
week in a row where the "dumb money" is neutral and the "smart money" is
bearish, and this is not a scenario that is generally supportive of higher
prices especially with prices on the S&P500 under their 40 week moving
average. The ideal situation for higher equity prices would be for the "smart
money" to be bullish and the "dumb money" bearish (i.e., bull signal).
The "dumb money" or investment sentiment composite indicator (see figure 1,
a weekly chart of the S&P500) looks for extremes in the data from 4 different
groups of investors who historically have been wrong on the market: 1) Investor
Intelligence; 2) Market Vane; 3) American Association of Individual Investors;
and 4) the put call ratio.
Figure 1. "Dumb Money"
When combining the "dumb money" indicator with other metrics such as poor
market internals and price under the 200 day moving average, we find that rallies
tend to fail after 4 weeks of the "dumb money" indicator being neutral. Therefore,
I would be a seller into rallies as the current set of conditions is
more consistent with intermediate term topping action. In essence, we need
to ask ourselves: what is going to propel prices higher? With sentiment no
longer bearish (i.e., bull signal) and market internals lackluster, this bear
market rally, which started in mid November, remains suspect.
Disclaimer: Guy M. Lerner is the editor and founder
of The Technical Take blog. His commentary on the financial markets
is based upon information thought to be reliable and is not meant as investment
advice. Under no circumstances does the information in his columns represent
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all positions are fully disclosed at http://thetechnicaltakedotcom.blogspot.com/.
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