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Investor Sentiment: In a Vacuum

Investors who have put their faith in Ben Bernanke have no one left to turn to. The SP500 is down only 3% or so from its QE3 highs, but in the recent past, a 3% drop was certainly enough for the cheer-leading bulls to start calling for more Federal Reserve intervention in hopes that these central bankers would come to the rescue yet again. This recent 3% drop has the bulls attention, but there are no calls for Bernanke to do more because the Fed can't do anything more as they already are "all in" with QE3 to infinity. It's like we are in a vacuum, and the silence is palpable as the bulls hope that the announcement of QE3 hasn't become a bull trap. As stated several weeks ago, QE3 was a game changer. The openendedness of the liquidity operation certainly was new, but the real game changer was that speculating on Fed intervention was no longer going to prop up the markets. With the Fed "all in", there is no more speculation. The failed breakout following the QE3 announcement should be concerning to the bulls.

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, and just below the extremely bullish level. Bullish sentiment is unwinding.

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 trading volume is seasonally light across the market as most companies have closed trading windows, effectively prohibiting insiders from buying or selling until after the release of Q3'12 earnings. This past week, sellers outnumbered buyers by a 7:5 margin market-wide and the top-line sectors showed Neutral sentiment readings."

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 71.02%. 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 72%.

Figure 3. Rydex Total Bull v. Total Bear/ weekly
Rydex Total Bull versus Total Bear Weekly

 


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