Investor Sentiment Leads Price

by Guest Author Guy M. Lerner

Current market sentiment remains neutral to bullish. The “dumb money” indicator is neutral while the Rydex market timers remain overly bullish (and this is bearish). Corporate insiders are showing no real inclination to “buy the dip”.

I am still of the belief that better buying opportunities are ahead and will be at lower prices; this is an opinion I have shared in these comments for months now. I would expect the great unwind that started last week to end up in a situation where we have too many bears. This will be our bull signal. What is not often appreciated about investor sentiment is that it generally leads price.

After all, investor sentiment is just a reflection of investors’ opinions about the market, and it is investors who make the market.

From this perspective, investors have been leaving the market, and they have been right to be bearish. At some point, this will be the consensus opinion, but for now, we are still a ways a way from that eventuality. 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: “The shortened week seemed to have little impact on insiders as market-wide sentiment was virtually unchanged despite a -14% drop in the number of buyers and a 4% increase in the number of sellers.”

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 68.66%. 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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Guy M. Lerner, MD has been writing about the markets for over 8 years. He is the proprietor of the TheTechnicalTake, a free blog dedicated to independent and original market analysis. He also provides a Premium Content newsletter that focuses on investor sentiment in the equity markets. Lerner is the principal partner in ARL Advisers, LLC, a registered investment advisory in the State of Kentucky. ARL Advisers, LLC offers a tactical asset allocation strategy that is strategic, balanced, and targeted. You can email him at: [email protected].