This is now the fourth week in a row where investor sentiment, as measured by the “Dumb Money” indicator, remains neutral. When we couple this with the fact that prices on the major stock indices remain below their 40 week moving averages, there is a high likelihood that the market will rollover in the next several weeks. I have previously discussed these observations in the article, “Investor Sentiment: Some Context”.
The “Dumb Money” indicator is shown in figure 1, and it is in the neutral zone. The “dumb money” looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investor Intelligence; 2) Market Vane; 3) American Association of Individual Investors; and 4) the put call ratio.
The bear market rally that started 5 weeks ago will likely stall over the next couple of weeks just as more investors are drawn into the market for fear of missing the “big one”. Why should the cycle of fear and greed be any different this time? While it does take bulls to make a bull market, there are several additional technical insights that suggest that this rally will fail:
Lastly, for completeness sake, I have included the “Smart Money” indicator in figure 3. The “smart money” indicator is a composite of the following data: 1) public to specialist short ratio; 2) specialist short to total short ratio; 3) SP100 option traders. The “smart money” remains neutral and this is surprising considering the 20 plus percent run in the major indices over the past 4 weeks.
Category: Market Sentiment