Investor Sentiment: There Is No Consensus
In the weekly sentiment round up we noted the bull signal generated by the “dumb money” indicator, yet there was very little supporting evidence from our other measures of investor sentiment. Specifically, I stated: “the current extreme reading in the “dumb money” indicator is not supported by other measures of investor sentiment. For example, the Rydex market timers are still showing extremes in bullishness and in some sense, they have been unwinding their bullish positions over the past several months. By no means are they bearish, and this data series is looking more like a market top than a market bottom.”
While the data is limited, it appears that the lack of consensus across all the sentiment data would suggest caution going forward, and that the current bull/ buy signal should NOT be honored. When it comes to market data and making decisions with your money, it is better to have more points of light shining on the issue. The “dumb money” indicator, which primarily uses opinion data, is showing modest extremes in bearishness. The Rydex data, which assesses asset flows and how investors are putting real money to work, shows too many bulls and has been more consistent with a market top. This discrepancy is shown in figure 1, a weekly chart of the SP500. The indicator in the middle panel is a ratio of all the assets in bullish and bearish Rydex funds. The indicator in the lower panel is an analogue representation of the “dumb money” indicator; when the indicator is up, there are too many bears, which is a bull signal.
Figure 1. SP500/ weekly
The red vertical lines are those times when the “dumb money” was bearish (i.e., bull signal) and the Rydex data did not confirm. While only 4 prior occurrences, they happen to be noteworthy. 3 of these occurred during the 2008 market top, and the fourth was just prior to the 2011 market swoon, which saw the SP500 drop 20% in 4 weeks.
In the final analysis, the lack of consensus amongst the sentiment indicators suggests caution, and based upon the limited observations, we can infer that deeper extremes of bearishness are needed prior to a tradeable rally.
Category: Market Sentiment, Rydex Market Timers
Excellent chart Dr. Lerner! The way I interpret the discrepancy between “dumb” money and Rydex (based on the chart history), is that a tradeable rally is ongoing, BUT it will be short-lived and may give way to a bear market by ~September.
Whether the S&P hits new highs or not is up for debate. If the S&P does, we could be putting in the “head” of a longer term H&S topping pattern just like 2008.
Of the red lines above, the only “failed” signal was after the neck line of the H&S broke in early 2008.
E: Thanks for the nice comment
Short term rally maybe but I think you will need to be nimble
Longer term…we need a bigger flush
I agree. The rally here will likely be short-lived (weeks) albeit strong. If this is indeed starting the long process of a market top, then I expect we’ll see this “dumb money” vs Rydex discrepancy occur again, just like we did in 2008.
Excellent work. I was wracking my brain the last couple weeks trying to understand the discrepancy between “dumb money” and Rydex, and your historical chart clears it up.