Last week's perfect alignment of the sentiment indicators has led to the expected bounce, but buying conviction remains a big question as volume was the lowest total for any week since Christmas, 2009.

The "smart money" and company insiders were buying, and these sentiment indicators have turned neutral. The "dumb money" remains bearish. However, the big question remains: how much conviction (and sustainability) is behind this bounce? If volume is any kind of tell, then one would expect this move to fizzle out like the prior (short covering) bounces over the summer when there were too many bears. Yes, it was a holiday shortened week (Labor Day and Rosh Hashanah), but volume on the S&P500 (symbol: $INX) came in at less than 50% of the prior year's already diminishing average.

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) Market Vane; 3) American Association of Individual Investors; and 4) the put call ratio. The "Dumb Money" indicator remains bearish for a third week in a row and this is a bullish signal. For a broader look at the significance of a bullish signal from the "Dumb Money" indicator, please check out the following article from March, 2009: "Putting a Bullish Signal Context." The current bounce has followed the expected script.

Figure 1. "Dumb Money"/ weekly

The "Smart Money" indicator is shown in figure 2. This is calculated utilizing data about SP100 options (or $OEX put call ratio), which is thought to represent large traders. The "smart money" is neutral. Previously, the "smart money" calculations utilized data from the NYSE; this data is no longer publicly available.

Figure 2. "Smart Money"/ weekly

Figure 3 is a weekly chart of the S&P500 with the InsiderScore "entire market" value in the lower panel. From the InsiderScore weekly report: "...insiders decided that their money was better spent on enjoying the Labor Day weekend as the number of companies with buying fell more than -35% and the number of companies with selling increased nearly 18%."

Figure 3. InsiderScore "Entire Market" Value/ 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 value of the indicator is 47.0%. Values less than 50% are associated with market bottoms.

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

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