Investor sentiment hit a bullish extreme when the Federal Reserve announced QE3 6 weeks ago. Sunny skies and clear sailing ahead were proclaimed by all those who only know one thing: how to be bullish. No wonder mom and pop investor are soured on Wall Street. Just when "they" tell you it's a can't miss market, well the market stumbles. The QE3 breakout has failed, and prices are below the QE3 announcement lows. Failed breakouts tend to see strong reversals in the opposite direction, and the foundation to this rally (rising prices on poor volume -- remember how the bulls swept this technical tidbit under the rug during the rally) is very poor. As stated last week, "The failed breakout following the QE3 announcement should be concerning to the bulls", and for the past several months, "This is a market top". Now prices and sentiment are unwinding, and I suspect it will require much lower prices to bring about 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, and just below the extremely bullish level. Bullish sentiment is unwinding.
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 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
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 70.63%. 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