Introduction

Our fundamental equity model, which utilizes investor sentiment, turned bearish in early February.  Our technical model remains constructive.  Bearish fundamentals plus bullish technicals equals NEUTRAL market environment, which should be ruled by overbought/ oversold market conditions.  As we acknowledged last week, this overbought/ oversold time frame is shrinking as time rolls on.  I stated: “This market is displaying a unique feature of a market top. The overbought and oversold time frame seems to shrink as time goes on. Those dips aren’t as deep and the rips tend to be sold more vigorously. This is a sign of market distribution, and a sign of a market built upon a weak foundation.”

The rules of our fundamental equity model are simple: every sell signal should be followed by a buy signal.  There are exceptions, but with over 23 years of data and nearly 50 prices cycles (where buy signals follow sell signals and so on), the is what we should expect.  Our fundamental equity model sell signal occurred in early February, and we are still waiting for the next buy signal, which should occur following a market sell off that produces sufficient investor fear as in the “world will never be the same” or “the bull market is over”.  Since the sell signal, all market indices (NASDAQ100, Russell 2000, SP500) are flat.  There is no edge, and in the absence of a market sell off that produces investor fear, we expect little oomph to any upside market action.

I have been saying all of this for weeks, but over this time, new data points have arisen, and we can get an idea of where the cracks might occur to produce sufficient investor fear.  See figure 1 a weekly chart of the SP500.  The key pivot point is at 1848.29 on the SP500.  A close below this support level on a weekly basis will likely see the bulls throw in the towel and have them turn bearish.  Breaks of support are never good, and if this support level breaks, there are several reasons to believe that this is part of a market top.  However, I cannot see this market just rolling over or a major market top without some kind of fight.  There should be a bounce despite the break of support.

Figure 1. SP500/ weekly

  So what am I watching?  The 1848.29 level on the SP500.

The Sentimeter

Figure 2 is our composite sentiment indicator. This is the data behind the “Sentimeter”. This is our most comprehensive equity market sentiment indicator, and it is constructed from 10 different variables that assess investor sentiment and behavior. It utilizes opinion data (i.e., Investors Intelligence) as well as asset data and money flows (i.e., Rydex and insider buying). The indicator goes back to 2004. (Editor’s note: Subscribers to the TacticalBeta Gold Service have this data available for download.) This composite sentiment indicator moved to its most extreme position 10 weeks ago, and prior extremes since the 2009 are noted with the pink vertical bars. The March, 2010, February, 2011, and February, 2012 signals were spot on — warning of a market top. The November, 2010 and December, 2012 signals were failures in the sense that prices continued significantly higher. The current reading is neutral.

Figure 2. The Sentimeter

Dumb Money/ Smart Money

The “Dumb Money” indicator (see figure 3) 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 3. The “Dumb Money”

Figure 4 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 is trending Neutral with the S&P 500 showing a Sell Bias and the Russell 2000, driven by Financial sector buying, showing a Slight Buy Bias. Buyers outnumbered non-10b5-1 sellers in the Russell 2000 last week, just the second time that’s happened since the beginning of 2013. The other time was the week ended February 4, 2014, when the index hit what is currently its six-month low and a level that could be challenged today. Overall, the Financial sector is showing the strongest sentiment; the Industrial Goods sector the weakest. ”

Figure 4. InsiderScore “Entire Market” value/ weekly

Rydex Asset Data

Figure 5 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 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 78.98%. The indicator crossed below the signal line. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops. It should be noted that the market topped out in 2011 and 2012 with this indicator between 70% and 72%.

Figure 5. Rydex Total Bull v. Total Bear/ weekly

The Rydex Buying Power indicator assesses the amount of money on the sidelines. It is “fuel” available for buying. This indicator assesses both non – committed money (i.e., assets in the money market fund) and committed money (i.e., assets in all of the bearish funds that could potentially wind up in bullish funds) as available money on the sidelines. Low indicator values suggest little money on the sidelines and are consistent with excessive bullishness (i.e., bear signals). High indicator values are consistent with increased buying power and are consistent excessive bearishness (i.e., bull signals). The current value of the indicator is at 32.45%. It was only 7 weeks ago that the indicator hit its lowest value since 2001 suggesting little firepower on the sidelines!!

Figure 6. Rydex Buying Power/ weekly

$VIX

Figure 7 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 current resistance key level is at 14.08 on the $VIX; the current support level is 12.65. This current range in the $VIX defines the range in price that we should continue to see. Look for the market to probe the lower levels of $VIX support; this is the range and where short term traders want to be sellers.

Figure 7. $VIX/ weekly