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Smells Like A Stock Market Top

Stock-Markets / Stock Markets 2010 Nov 28, 2010 - 12:47 PM GMT

By: Guy_Lerner

Stock-Markets

Best Financial Markets Analysis ArticleIt was only 2 weeks ago that the "dumb money" indicator and Rydex market timers were bullish to an extreme degree and company insiders were selling shares at a clip that had not been seen in 4 years. In most instances, these are bearish signals. The exception would be the scenario where too many bulls actually leads to a bull market.


This is what happened in 1995, 1998/ 1999, 2003 and 2009. Will this scenario be repeated in 2010? It is seeming less and less likely, and if this is the case, then it is worth repeating what I have stated for 3 weeks in a row: "If the market hasn't topped out already, it should do so within a couple of percent of the recent highs. Rallies should be sold and stops tightened up. The market is prone to sudden sell offs. There will be better risk adjusted opportunities to buy in the future."

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) Market Vane; 3) American Association of Individual Investors; and 4) the put call ratio. The "Dumb Money" indicator remains in neutral territory ever so slightly.

Figure 1. "Dumb Money"/ weekly

Figure 2 is a weekly chart of the S&P500 with the InsiderScore "entire market” value in the lower panel. From the InsiderScore weekly report: "Insiders across the market continue to sell at an impressive clip, however it's clear that the activity peaked during the week ended November 9th."

Figure 2. InsiderScore "Entire Market" Value/ weekly

Figure 3 is a weekly chart of the S&P500. 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 58.33%. 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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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.

    © 2010 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

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