The "dumb money" remains extremely bullish and the "smart money" is bearish. It has been that way now for 3 weeks and as expected, gains are flattening out. Over the last 4 weeks, the SP500 has gained 1.38%, 0.33%, 0.28% and 0.05% week to week. What should we make of the past week's price action where the dip was a little more than 2% and lasted for only 24 hours before being bought? Nothing as the SP500 is right back where it was 4 weeks ago! At best and without a more substantial pullback to clear the market of weak hands, the major averages should grind higher. In other words (and my advice), don't put new money to work without a pullback. At worse, the rug can be pulled out from this market and in this instance, gains can easily evaporate like the May 5, 2010 "flash crash" or the 2011 version, which saw the SP500 drop 18% in 3 weeks. That is the risk you take when you chase prices or believe such things as "Bernanke has your back". From my perspective, the rally is closer to its end then the beginning, and this alone has me neutral to bullish - i.e., in grind higher mode but with 1 eye on the exits.
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
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 levels remained elevated last week, especially within the S&P 500. There was, however, an increase in buying and a modest improvement in sentiment within the Russell 2000. Additionally, we saw a return of buyers in the Banking sector, where a sudden cessation in buying the prior week caused us some concern."
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 71.13%. This is the first week in 12 that the indicator has turned down week over week. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops. It should be noted that the market topped out in 2011 with this indicator between 70% and 71%.
Figure 3. Rydex Total Bull v. Total Bear/ weekly
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