This week the sentiment indicators are stuck in neutral ground, which makes sense considering investors can't always be extremely bearish or bullish. 4 weeks ago investors were extremely bearish and oops -- wrong! The recent bearish extremes have given into more neutral readings as investors are chasing prices higher. The current thrust from the lows is likely to remain choppy for several reasons, an opinion I have shared for several weeks now. One, there wasn't a consensus amongst the sentiment indicators at the recent bottom. For example at the bottom, the "dumb money" indicator was bearish (i.e., bull signal) while corporate insiders were just neutral. Two, the Rydex data shows a lack of shorts in this market, and this means that short covering will not help propel this market higher. Three, it is summer and well, there seems to be a lack of interest. Lastly, while the news flow is very strong which leads to increasing volatility, the circus surrounding the debt ceiling will be just that a circus. In the end, nothing and I repeat nothing will be done to "roil" the markets. Some sort of compromise will be reached. Life as we know it will go on. Dullsville!
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 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: "Insider sentiment was neutral as transactional volume was seasonally light ahead of the start earnings season. Volume was so light, in fact, that the number of weekly buyers was the lowest ever we've recorded, dating back 389 weeks to January 1, 2004. The number of sellers, meanwhile, was the 39th-lowest on record. Activity will remain constrained this week and, to a less degree, next week as companies prep their Q2'11 earnings announcements."
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 64.08%. 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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