Investor Sentiment: Remember This

by Guy Lerner

Investor sentiment remains without change week over week. One would think that the markets are being held captive to the news flow coming out of Washington, but let’s remember this: nothing will be done to roil the markets. Even the great one, our President, said this: “I think it’s very important that the leadership understands that Wall Street will be opening on Monday, and we better have some answers during the course of the next several days.” It is my belief that the day to day uncertainty is actually equity positive yet meaningless because in the end, a deal will get done. Buyers are buying on the obvious. The debt ceiling will be raised. Nothing will be done to throttle the one bright spot of our economy — a rising equity market. How will the market respond once the deal is done? Will this be a sell the news reaction? Hard to know, but one thing is for certain: the deal will likely fall far short on substance when it comes to fixing the real issues facing the country.

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: “Sentiment across the market is neutral heading into earnings season as transactional volume last week was not just seasonally low, but historically low as well. For our 391-week tracking period (dating to January 1, 2004), the number of buyers was the third-lowest on record and the number of sellers was the sixth-lowest on record. The result was the lowest number of non-options, non-10b5-1 transactions in any given week during our tracking period; and, sentiment readings across all tracking groups – sectors and indices – coming in neutral (Ed. Note: This particular week is always the slowest of the year). This sets up nicely to get post-earnings tells as the volume of trades will increase week-over-week going forward.”

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 65.42%. 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

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