Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24
THE GLOBAL WARMING CLIMATE CHANGE MEGA-TREND IS THE INFLATION MEGA-TREND! - 3rd May 24
Banxe Reviews: Revolutionising Financial Transactions with Innovative Solutions - 3rd May 24
MRNA - The beginning of the end of cancer? - 3rd May 24
The Future of Gaming: What's Coming Next? - 3rd May 24
What is A Split Capital Investment Trust? - 3rd May 24
AI Tech Stocks Earnings Season Stock Market Correction Opportunities - 29th Apr 24
The Federal Reserve's $34.5 Trillion Problem - 29th Apr 24
Inflation Still Runs Hot, Gold and Silver Prices Stabilize - 29th Apr 24
GOLD, OIL and WHEAT STOCKS - 29th Apr 24
Is Bitcoin Still an Asymmetric Opportunity? - 29th Apr 24
AI Tech Stocks Earnings Season Opportunities - 28th Apr 24
S&P Stock Market Detailed Trend Forecast Into End 2024 - 25th Apr 24
US Presidential Election Year Equity Performance in the Presence of an Inverted Yield Curve- 25th Apr 24
Stock Market "Bullish Buzz" Reaches Highest Level in 53 Years - 25th Apr 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

It Takes Bulls to Make a Stocks Bull Market

Stock-Markets / Articles May 10, 2009 - 07:44 PM GMT

By: Guy_Lerner

Stock-Markets

Best Financial Markets Analysis ArticleThe "Dumb Money" indicator now shows that there are too many bulls. From a contrarian perspective, one would think that this is bearish for prices as there are too many believers in what pundits are calling the next bull market - "hey you, your missing the train... your missing a generational buying opportunity". But in reality, it takes bulls to make a bull market. So higher prices and excessive bullish sentiment have occurred together in the past, and this dynamic is generally the norm in a bull market as the data shows. On the other hand, the bulls - or newly bullish let's say - should be careful what they wish for as excessive bullish sentiment can also herald an intermediate term top in a bear market.

The "dumb money" looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investor Intelligence; 2) Market Vane; 3) American Association of Individual Investors; and 4) the put call ratio. See figure 1.

Figure 1. "Dumb Money"/ weekly

To provide some context as to the significance of too many bulls, let's construct a study. We will "buy" the SP500 when the "Dumb Money" indicator shows that there are too many bulls and we will sell when this condition is relieved. In other words, we are only in the market when the indicator is red and above the upper line. Commissions and slippage are not considered.

Since 1990, such a strategy has yielded 41 unique signals or trades. 46% of the signals were winners, and this strategy generated a paltry 72 S&P500 points; buy and hold over this time period has yielded 570 S&P500 points. Your time in the market was 23%. If this was the only strategy you traded since 1991, you would have an equity curve that looked like the one in figure 2.

Figure 2. Equity Curve/ "too many bulls"

Now let's put the notion of excessive bullish sentiment aside for a moment and go back in time about 10 weeks when there were too many bears. Let's construct another strategy where we "buy" the S&P500 only during the time when the "Dumb Money" indicator shows that investor sentiment is too bearish. I previously discussed the significance of excessive bearish sentiment in the March 8, 2009 (note the date) article, "Putting A Bullish Signal In Context". Since 1990, there have been 42 unique signals or trades; 80% have been profitable. This strategy generated 647 S&P500 points (versus 600 S&P500 points for buy and hold) with only 20% market exposure. The equity curve for this strategy is shown in figure 3.

Figure 3. Equity Curve/ "too many bears"


Comparing the two strategies and equity curves, I will leave it up to you as to what point in the price cycle you want to be invested.

But let's look a bit more closely at our current dynamic - "too many bulls" - and the equity curve in figure 2. From 1994 to 1999, the curve makes a nice 45 degree ascent; this coincides with the end of the 20 year bull market. So, during this time, it was a good idea to buy when everyone was bullish. Remember, it takes bulls to make a bull market. From 1999 to December, 2002, this strategy of buying when there are too many bulls gave back the gains from the 1990's. Then from December, 2002 to December, 2006 the strategy yielded positive results, and since 2006, the strategy has not been too kind to the bulls.

So what is the take away message? Some times it pays to play with the bulls and sometimes it doesn't. Too many bulls is a hallmark of a bull market, and at other times, it is a hallmark of a market top. I guess it all boils down to one simple question: is this a bull market? My current feelings on this topic are stated in "Bear Market Rally Or New Bull?".

For the record, the "Smart Money" indicator is shown in figure 4. The "smart money" indicator is a composite of the following data: 1) public to specialist short ratio; 2) specialist short to total short ratio; 3) SP100 option traders. The "smart money" is less bullish this week than last.

Figure 4. "Smart Money"/ weekly

By Guy Lerner

http://thetechnicaltakedotcom.blogspot.com/

Guy M. Lerner, MD is the founder of ARL Advisers, LLC and managing partner of ARL Investment Partners, L.P. Dr. Lerner utilizes a research driven approach to determine those factors which lead to sustainable moves in the markets. He has developed many proprietary tools and trading models in his quest to outperform. Over the past four years, Lerner has shared his innovative approach with the readers of RealMoney.com and TheStreet.com as a featured columnist. He has been a regular guest on the Money Man Radio Show, DEX-TV, routinely published in the some of the most widely-read financial publications and has been a marquee speaker at financial seminars around the world.

© 2009 Copyright Guy Lerner - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Guy Lerner Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in