It has been about 9 weeks since the SP500 sold off losing nearly 10% over a 5 week span. As expected, investors turned bearish — although only modestly so–yet buyers surfaced at the widely watched 200 day moving average. Prices have bounced -not vigorously — over the next 9 weeks, and we find ourselves back at the cyclical highs. Not much of anything has been settled. Looking ahead and that is what we all want to know anyways — what happens next? I believe the sentiment data is consistent with a market top. The lack of real bearish sentiment at the recent bottom would suggest that this rally would not carry too far. Currently investors are neutral to bullish in their outlook and while this is not a bear signal, the sentiment picture would suggest that we are closer to the end than the beginning of the rally especially since cyclical highs are fast approaching.
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.
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: ” A Slight Sell Bias began to emerge as transactional volume lifted off of seasonally low levels in the wake of the first big batch of earnings announcements. This is not unusual given the healthier market backdrop and the ratio of upside-to-downside earnings surprises. No sector showed particularly strong sentiment, though volume remained constrained in most, and the Russell 2000, a better indicator of sentiment than the S&P 500, displayed Neutral sentiment. Transactional volume will continue to increase over the next few weeks as the bulk of companies announce Q2’12 results.”
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 68.86%. 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