Investor Sentiment: What is the Significance?
As expected, the bearish extremes in sentiment have resolved or are resolving into a more neutral investor stance as prices in the equity markets have risen. This is what one would expect. Higher prices tend to bring out the bulls. Whether one can attach any significance to higher prices is a point of contention that I would gladly make. For most, it seems that higher prices must mean something like the economy is getting stronger or the crisis du jour has been averted. For those who put faith in such analysis, I would ask: what was the market seeing at the 2008 top? The markets are higher because that is what markets are suppose to do - go up. This is what the average citizen, government officials and most market participants want. Sometimes the markets are right, and sometimes the markets get it wrong. Higher prices are a sign hope, and whether hope meets reality has yet to be determined. In the final analysis, seasonal factors, an expected positive resolution to macro economic events, and investors sitting on the sidelines wanting to get into this market will likely be positive factors. As stated last week, dips will be bought, and I don't see that changing now.
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: "Insider trading volumes were extremely low last week as most executives and directors continued to be prohibited from buying/selling until after their respective companies' Q3'11 earnings report. In fact, this past week saw the fewest aggregate number of unique insider buyers and unique sellers in at least seven years."
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 51.28%. 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
To see how useful the Rydex data has been over the past 3 months, please click HERE!
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