Investor Sentiment: It’s All Good, but…
The price action this past week was fabulous as the market found its winning ways on the back of AAPL earnings and a Federal Reserve that remains as compliant as ever. It’s all good, and no doubt this can only mean one thing. It’s clear sailing ahead. But not so fast. From this perspective the price action looks more like a market top than a launching pad for another bull run. Huh? Yeah, a market top. The lack of bullish signals, where there are more bears than bulls in any time frame beyond 60 minutes, is consistent with a market top. Price action built on this kind of foundation is prone to fail as the weak hands never get taken out of the market until the very end.
As a reminder, the 2011 market top took over 6 months to develop. The SP500 traveled in a narrow 75 point range before dropping 20% over a 4 week period. The current price range is 65 SP500 points, and the current market environment has many similarities to 2011. The top can best be described as a period of discussion. Is the economy sputtering? Will the European contagion effect the US economy? Will the fiscal cliff be realized? And of course, the #1 topic of discussion and the only one that matters: will there be QE3? This all sounds familiar.
This is a range bound market. For those investors who want to act like traders, this means to sell at or near the top of the range and buy near the lows. For those investors, who want to act like investors, “sell in May” may be an appropriate strategy. There will be better opportunities ahead.
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 now neutral.
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 was seasonally light last week as most insiders remained on the sidelines, waiting for their respective companies to report Q1’12 earnings. There was no follow through in the Russell 2000, where a week earlier an Industry Buy Inflection was triggered, as activity quickly waned and a rather typical seasonal imbalance in the ratio of sellers to buyers returned. We should begin to see significant insider trading volume near the end of next week or the beginning of the following week.”
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 65.34%. This is the second week in a row 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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Blue:
you may eventually be right that we are in a topping pattern but i disagree that current price action tells us that.
We are making higher highs and higher lows on the spx, dow and ndx (green light); transports and russell are lagging (yellow light). dollar is weak and getting weaker. (green light). Fed has said they will come in if needed (Bernanke put) (green light)
Sentiment just one week ago was that as apple was correcting and headed lower, that the market would fall apart…ie bearish. sentiment is more bullish today than 5 days ago but hardly ebullient. my opinion is sentiment is somewhat neutral.
Appreciate the newsletter and best of luck in your investing endeavors!
Chris Dress
C & C investments llc
Chris
Thanks for the nice comments
I am never quite sure what the price action really means these days; for example, what was the market thinking at the highs in late 2007? In the following year, the SP500 dropped about 50%.
For the record, I have been pretty clear about calling for a slowing in the ascent of prices (which I wrote about over 6 weeks ago) and the possibility of a top; a top doesn’t necessarily mean that the floor will suddenly give way; tops take time to develop and I think that what we have been getting and will likely get going forward….in my opinion, unless I turn into a short term trader (which I am not), there should be better opportunities in other assets
I don’t see it & believe this May will surprise to the upside.
Unlike the last two years, this is an election year, and the Fed is doing everything it can to expedite the case for further easing. Case-in-point: the Fed now has both esimates of the funds rate through 2014 and GDP estimates by it’s constituents going forward. If you look at how optimistic the GDP estimates are, clearly the Fed will have impetus to either ease (GDP slows), or, growth surprises to the upside. Worst case is a minor correction (~5%) due to an overbought market.
time will tell….I have my points were I cry uncle…there is a lot of faith in the Fed, but their ability to produce desired results is waning
Never go against the feds,you will be disappointed.
Ralph
Coco:
thanks for commenting
If you followed that rule –i.e., don’t bet against the Fed –, then I would like to know what you did or how you fared from 2001 to 2003. If I remember and why I love history, the Fed dropped rates from 5% to 1%, and the stock market dropped 45% (SP500) and 75% (the NASDAQ)….so let me ask: how did that rule help you then?