Investor Sentiment: Bounce Mode

By: Guy Lerner | Sat, Feb 20, 2010
Print Email

The investor sentiment data is consistent with a market that is in bounce mode. Following the late January sell off, investors really did not become too bearish. The subsequent bounce over the past 2 weeks has once again created a sense of complacency across our various metrics. In light of this, it will be difficult for the major stock indices to climb to new highs. Despite the recent short term strength, it is still my contention that we will need to go lower before heading meaningfully higher. I discussed the research behind this claim in the article, "Why I Think We Need To Go Lower Before Going Higher".

The "Dumb Money" indicator, which is shown in figure 1, 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. The "Dumb Money" indicator is neutral.

Figure 1. "Dumb Money" Indicator/ weekly

The "Smart Money" indicator is shown in figure 2. The "smart money" indicator is a composite of the following data: 1) public to specialist short ratio; 2) specialist short to total short ratio; 3) SP100 option traders. The Smart Money indicator is neutral to bearish.

Figure 2. "Smart Money" Indicator/ weekly

Figure 3 is a weekly chart of the S&P500 with the InsiderScore "entire market" value in the lower panel. Insider trading volumes remain light although selling is picking up as prices on the major indices rise.

Figure 3. InsiderScore Entire Market/ weekly

Figure 4 is a weekly chart of the S&P500. 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 indicator is headed towards a bullish signal (suggesting too many bears) but it is not there yet. Once again, this suggests investors have bought the dip early, and in all likelihood, they will be disappointed as it will take lower prices to bring about a more lasting bottom and tradeable rally.

Figure 4. Rydex Total Bull v. Total Bear/ weekly

I ask myself one simple question every week: is this the market environment that will take me from here to there? From a sentiment perspective the answer is "no". The "smart money" and insiders have yet to turn bullish, and at best, only some of the shorter term Rydex data would suggest that the bounce may be with us for a few more days. This is not the environment where I will be making the big bet.



Guy Lerner

Author: Guy Lerner

Guy M. Lerner

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 a recommendation to buy or sell stocks. Lerner may on occasion hold positions in the securities mentioned in his columns and on the Web site; in all instances, all positions are fully disclosed at However, their positions may change at anytime. For more information on any of the above, please review The Technical Take's full Terms of Use and Privacy Policy (link below). While Lerner cannot provide investment advice or recommendations, he invites you to send your comments to:

Copyright Notice: Except for making one printed copy of this newsletter or any other materials, files or documents available from, accessible through or published by TheTechnicalTake, LLC for your personal use (or downloading for the same limited purpose), none of these said materials, files and/or documents may be reproduced, republished, rebroadcast or otherwise re-distributed without the prior expressed written permission of Guy M. Lerner.

Copyright © 2004-2012 Guy Lerner

All Images, XHTML Renderings, and Source Code Copyright ©