Investor Sentiment: Sparking a Feeding Frenzy
The big news for the week isn't the economy or Europe but how much Ben and the boys are willing to go "all in". There is no doubt that QE3 is going to happen, but whether the FOMC shocks the markets into an asset grabbing frenzy with a bigger than expected announcement is not clear. It seems likely given Chairman Bernanke's history. If the Fed is complicit to the market wishes, there is no doubt a feeding frenzy should ensue as the majority of investors are on the sidelines and poorly positioned for any rally. The "dumb money" and Rydex market timer remain extremely bearish, and corporate insiders have increased their buying. These are bullish signs.
In last week's article on sentiment I stated: "It is hard to see what the catalyst might be that could change the fortunes of the economy and the stock market." Well we know what could juice the stock market, but how that is going to translate into changing the fortunes of the economy is unclear.
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 shows extreme bearish sentiment, and this is a bull signal.
Figure 1. "Dumb Money"/ weekly
Figure 2 is a weekly chart of the SP500 with the InsiderScore "entire market" value in the lower panel. From the InsiderScore weekly report: "Insiders did an about-face last week as the number of sellers fell -46% and the number of buyers rose 20% sequentially (the previous week saw a -44% drop in buyers and 24% increase in sellers). Sentiment, as measured by our proprietary scoring system, improved to the edge of the wide Neutral and Bullish Bias zones. The dramatic decrease in the number of sellers coupled with a solid increase in the number of buyers is an obvious positive sign as the market nearly touched its early August low again last week."
Figure 2. InsiderScore "Entire Market" value/ weekly
Figure 3 is a weekly chart of the SP500. 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 indicatoris 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 value of the indicator is 47.0%. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops.
Figure 3. Rydex Total Bull v. Total Bear/ weekly
Let me also remind readers that we are offering a 1 month FREE TRIAL to our Premium Content service, which focuses on daily market sentiment and the Rydex asset data. This is excellent data based upon real assets not opinions! We have a new 1-click sign up process! Credit cards are not required. And oh, prices are going up in October.
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