Last week, the battle lines were drawn, and after much (and expected I might add) volatility this week, little has been resolved. The "dumb money" indicator remains bearish, and this is a bull signal that should resolve itself positively (80% chance) over the next 5 weeks on average with an acceptable draw down . But the data remains "lumpy". Corporate insiders have not been buying to any great degree, and the Rydex market timers remain too bullish. As stated earlier in the week, "the best bottoms leading to the most sustainable price moves occur when all 3 indicators are in alignment". This has yet to happen, and week over week, there has been little change in the sentiment data.
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 is extremely bearish, 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: "Market-wide sentiment was slightly positive as most of our key metrics were on the plus-side of their 52-week averages. Sentiment was not as strong as a week earlier when an Industry Buy Inflection, an important quantitative indicator of a possible market bottom, was tripped in the Russell 2000. Activity this past week was more measured and the buying was led by directors and institutions and not executives. With the quarter coming to a close, insider transactional volume will begin its seasonal decline. Levels will remain constrained through about the third week of Q3'11 when activity will pick-up again in the wake of the first big round of earnings announcements. It's too early to tell whether the aforementioned Industry Buy Inflection in the Russell 2000 did in fact signal a market bottom, but the early returns are in favor of the signal being right for the twelfth time out of fourteen occurrences since 2004."
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 60.22%. 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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