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Investor Sentiment: Heading Into the Final Stages

As long as the bulls continue to believe, the market should continue to push higher, but there will be a limit. Clearly, the best, most accelerated gains are behind us, and from this point onward, the gains will be harder to come by. Investors should have been buying back here (see article from October 7, 2011) when risks were perceived to be high. Instead, investors are buying now when there is a belief that the market is a sure thing. Sure things and market profits are normally not found in the same sentence. Nonetheless and as stated last week, I would embrace the current bullishness, but be aware that signs of a market top are starting to crop up. For example, the depth and duration of market sell offs has become very brief as investors feel like they are missing out. Or company insiders have increased their selling significantly. The best thing the market can do is sell off and take the "weak hands" out of their positions, but that doesn't seem to be in the cards.

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 bullishness.

Figure 1. "Dumb Money"/ weekly
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 selling increased last week as a big wave of insiders saw trading windows open and were free to trade following their companies' earnings announcements. Selling has not reached a level that has triggered any major red flags quantitatively or qualitatively."

Figure 2. InsiderScore "Entire Market" value/ weekly
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 69.14%. 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
Rydex Total Bull versus Total Bear Weekly

 


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