Investor Sentiment: Another case of selling low and buying high?

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The article below is a guest contribution by Guy Lerner, writer of the Technical Take blog.

In aggregate, investor sentiment is neutral. The “dumb money” and Rydex market timer continue to get more bullish after missing out on the bulk of the gains in October. Company insiders are not showing any great clarity as well. Nonetheless, investors want in to this market, and this can be seen by the dips being so shallow. But curiously, prices haven’t gone anywhere in two weeks. The time to be in the market and accepting market risk was back in September. At best prices are range bound (as reflected by the neutral investor sentiment) and the market is just digesting the October gains. At worst, this is just another bear market rally. Is this just another case of investors selling low and buying high? That story has yet to be written, but I suspect we will find out over the next month.

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 shows neutral sentiment.

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: “There were some encouraging and discouraging signals from insiders last week. On the one hand, the number of buyers rose 78% week-over-week and the ratio of sellers to buyers narrowed from nearly 3-to-1 a week earlier to closer to 2-to-1. On the other hand, the number of sellers was the highest since the week ended May 31st. The Technology sector was the main negative driver as sentiment by one measure – our Industry Score – moved to its worst level in a year. No sector displayed bullish sentiment, although the Healthcare sector was showing some positive signs.”

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 indicatoris 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 62.81%. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops.

Figure 3. Rydex Total Bull v. Total Bear/ weekly

Let me also remind readers that we are offering a one-month free trial to our Daily Sentiment Report, which focuses on daily market sentiment and the Rydex asset data. This is excellent data based upon real assets and not opinions.

Source: Guy Lerner, Technical Take, November 13, 2011.

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