Figure 1 shows a weekly chart of the SP500 with the composite sentiment indicator. This indicator is constructed from 10 different variables that assess investor sentiment and behavior. It utilizes opinion data (i.e., Investors Intelligence) as well as asset data and money flows (i.e., Rydex and insider buying).
Figure 1. SP500/ weekly
When this rally started 6 weeks ago, prices were bouncing off the 40 week moving average. In the 8 weeks prior to this, the SP500 dropped 10% from cyclical highs. When the bounce started, the composite sentiment indicator showed little if any bearishness amongst this wide group of investors. (See gray oval on indicator). The best market bottoms leading to the best gains occur when bearish sentiment is more extreme. More extreme implies that the rubber band is stretch real tight and the snap back will be real strong. The current position of the indicator would suggest that the rubber band was not stretched too tight at all when this rally started, so we should not expect strong gains.
Investors’ belief in the Bernanke put has remained strong. This is the only dynamic that could alter the current weak price action. In the absence of Fed intervention, higher prices are currently not sustainable when considering the sentiment picture.