Last week, I stated that "higher prices should be supported by increasing number of bulls, and this would be a signal that a sustainable rally, that everyone so desperately wants, is unfolding." So this past week, the SP500 gained about 1.6% and bullishness increased dramatically both in the Rydex data set and with the "dumb money" indicator. Yet, despite these positive developments to recruit more investors into the bullish camp, much work needs to be done. Volume is the probably the biggest issue, and the lack of volume means lack of investor conviction. So while there are more bulls, they are chasing prices higher with one hand already on the eject button. My data still suggests a mixed sentiment picture, and at this stage of the rally (relative to the time elapsed from the October lows), prices and bullish sentiment should have been much greater. The fact that the bulls have yet to take the reigns of this market suggests caution. These are still not the makings of a sustainable rally. This still looks like investors are rushing to the edge of a cliff as opposed to the promise land and nirvana of a bull market.
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 neutral sentiment.
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: "Our key sentiment readings all flashed Neutral signals as transactional volume across the market was low due to the holidays and trading windows closing at many companies as Q4'11 ended. Volume will be seasonally low for the next three weeks as insiders are pushed to the sidelines with their companies preparing 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 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 61.49%. 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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