Introduction

7 weeks ago, our “dumb money” indicator (see figure 1 below) dipped its toe into the extreme pessimism range after the markets (i.e., SP500) sold off only modestly (<5%).  Since that single week extreme reading which was not a buy signal by our measures, the SP500 is up nearly 3%.  The pullback on the way down wasn’t horrific by any means, and consequently, the bounce back shouldn’t occur with any great alacrity.  But here we are with the SP500 notching new highs nearly everyday.  Despite this we are still inclined to call this a NEUTRAL market environment, where the highs should be sold and where the dips should be bought, and as the sentiment indicators have a bullish skew, we don’t expect the downside to be too probing.  After all, investors want in to this market, and so this should keep the sell offs relatively shallow.

But then again, a market that doesn’t sell off and clear the weak hands is a market built on a poor foundation.  This would describe the current dip buying in this market.  On our measures, the last oversold reading in the SP500 on a 60 minute time frame occurred nearly 2 months ago.  The last oversold time frame on the daily charts was in February.  Markets need to sell off just as humans need to exhale once in a while!!  All this urgent dip buying following very shallow sell offs is more consistent with a market top because this is what happens at market tops.  A weekly close below SP500 1848 would be consistent with a market top.  The SP500 is currently 4% above this important support level.

In summary, the SP500 is at new highs, and it got here on lackluster, low volume price action.  Summer is approaching.  The sentiment indicators have a bullish skew.  We still stand by our NEUTRAL market call. We just don’t believe there is any real great edge especially with prices at new highs.

Dumb Money/ Smart Money

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. The indicator shows that investors are NEUTRAL.

Figure 1. The “Dumb Money”

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 continues to be in positive territory as the divergence seen in the market plays out amongst insiders as well. Sentiment within the S&P 500, which hit a new all-time high today, is Neutral; sentiment within the Russell 2000, which is currently -6.5% off its March all-time high, is in Bullish Bias territory. The Financial sector continues to show the most positive sentiment, followed by Consumer Staples and Healthcare; the Telecommunications, Utilities and Industrial Goods industries are showing the most negative sentiment.”

Figure 2. InsiderScore “Entire Market” value/ weekly

$VIX

Figure 3 is a weekly chart of the SP500 with the $VIX data in the lower panel. The black dots on the $VIX data are key pivot points, which are areas of support and resistance. The $VIX has closed at 11.40, and this is a multi-year low. Resistance is at a $VIX level of 12.22.  Multi-year lows in the $VIX late in bull market cycles tend to be signs of complacency.  Based upon this, we should expect selling in prices in the near future.  See last week’s Weekly Sentiment Report. 

Figure 3. $VIX/ weekly