Investor sentiment: Looking ahead

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

The best way to get more investors to turn more bearish in their outlook is to have lower prices. The sentiment indicators are nowhere near the kinds of extremes seen at market bottoms, so it would be my expectation that we will see lower prices as market bottoms tend to coincide with bearish extremes in the sentiment indicators. If I were to guess, those extremes in bearish sentiment (i.e., bull signal) will likely be seen as prices approach the August, 2011 lows. Let’s call that level SP500 ~ 1100. Looking ahead, this area of support (i.e., prior buying area) will be our battleground.

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: “Market-wide sentiment improved, pushing further into neutral territory and away from bearish territory, as the number of buyers increased 72% week-over-week and the number of sellers fell -10% over the same period. Sentiment is very mixed overall, with a high number of positive and negative Unusual Events.”

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 58.93%. 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 27, 2011.

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