The number of bulls continue to increase as the "dumb money" indicator approaches extreme levels. I am not sure what these investors are seeing, but we do know that higher prices will bring out the bullish instincts. Putting our own emotions aside and looking at the data, extremes in bullish sentiment this late in a bullish run are better sold (i.e., lighten up on long exposure) than bought.
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. This indicator is barely neutral.
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 we summarize: "Virtually repeating word-for-word what we said last week; there was little change week-over-week as insider sentiment remained in a Bearish Bias zone. Sellers outnumbered buyers more than 3-to-1 and have now been the dominant transactee every week since the beginning of September 2010 (32 weeks). No one sector stood out in terms of sentiment as activity was democratically dispersed. Transactional volume was seasonally light and will decrease further over the next few weeks as companies prepare to announce Q1'11 earnings."
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 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 66.64%. 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
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