The current set up is bullish not because investor sentiment remains extremely bearish, but because prices have closed above a key pivot level. For the SP500, the key pivot is at SP500 1133.65; this was resistance, and it is now support. Fake outs do happen, and they typically lead to strong price moves. Closes above resistance levels are bullish. Let me be clear, I don't believe this represents the start of a new bull market, but is a counter trend trade within an ongoing bear market, and I would not be surprised to see prices trade to the next resistance level at SP500 1267.71. This would be a respectable 10% move into the end of the year.
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: "Insiders demonstrated a bullish bias, a move that is somewhat unusual at this point in the game as the closing of trading windows dampens activity. Still, although we saw the number of buyers fall off -- not unusual considering the lock-ups -- they managed to outpace the number of sellers by a 3:1 margin."
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 43.8%. 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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