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Investor Sentiment: Still Not There Yet

Even I am surprised. The SP500 is down 9% in 9 weeks, and the bulls have yet to throw in the towel. Usually, the perma-bull crowd starts biting their collective nails when the market has one down day, so after the recent schmeisting, I can only wonder what they must be thinking. Apparently not much or maybe they are frozen like deer caught in the headlights. Anyway, it's not what I think but what the indicators indicate, and right now, the indicators show that investors really aren't that bearish. They are headed in that direction, and out of that bearishness will spring the next buying opportunity.

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
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: "Sentiment across the market remained very positive last week as Industry Buy Inflections, our strongest quantitative indicators of positive sentiment, triggered in the S&P 500, and, Healthcare and Technology sectors. The Russell 2000, and, Consumer Discretionary, Energy, Financial, Industrial Goods and Materials sectors each had Industry Buy Inflections trigger the prior week. As we noted in our Market-Wide Buy Inflection Update, the sentiment is not as strong as it was during out last market-wide inflection event in August 2011, nonetheless, Market-Wide Inflections are rare and Industry Buy Inflections are rarest within the S&P 500."

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 64.76%. 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
Rydex Total Bull versus Total Bear Weekly


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