Introduction

Patience is a virtue not oft exhibited by market participants.

Our models continue to show the following:

We are in a NEUTRAL market environment

A neutral market environment implies little or no investing edge.  By our analysis, the market could go up or it could go down.  While this is not very profound, this really is the case.  Over the past 2 years, such neutral market environments saw the markets rise rather profoundly usually goosed higher by some Federal Reserve asset purchase program or just plain old jawboning.  But from 192 to 2012,  there were very mixed results offering investors little investment edge.

Our equity model produced a sell signal on February 7, 2014

Our fundamental equity model, which relies upon market sentiment, produced a sell signal nearly 2 months ago.  The SP500 is up a couple of percent in this time, but the Russell 2000 and NASDAQ100 are nearly flat.  More importantly, the model’s current sell signal has yet to be followed by a buy signal.  This is the concept of the price cycle that helps define the path of prices as they go from high to low and back to high again.  What would a buy signal look like?  Investors turning very bearish on equities.  How does that happen?  The best, most efficient way, is to have lower prices.  In the absence of a buy signal, the market should just flounder.

Look at it from this perspective.  A bull market that fails to clear out the weak hands (i.e., sell off) on a periodic basis is really a bull market built on a weak foundation.  Over the past 2 years, market participants have been unable to tolerate a sell off greater than a few percent without some kind market intervention stymieing the down side action.

The technicals are supportive but cracks are showing

If you look at the market technicals, there are clearly some kinks in the armor. While the SP500 remains above support levels, more speculative indices, like the Russell 2000 and NASDAQ100, are showing early signs of breaking down as prices close below negative divergence bars, which are minor levels of support.  See this week’s Equity Chart Book for a review of market technicals. In any case, positive technicals (although showing signs of weakness) and non supportive fundamentals spells a NEUTRAL market environment.

So what should an investor do?

Remain patient.  Take up another hobby.  Read a book.  Spend time with your family.

The bottom line is that the market has been flat for nearly 8 weeks.  Highs are being sold and the dips are being bought.  However, in a sure sign of urgency that is misplaced, investors are buying that dip on shorter and shorter time frames.  Once again, in the absence of a buy signal, there is a high likelihood that the market will just struggle.

With regards to market sentiment, the “dumb money” is neutral. The Rydex data is consistent with too many bulls (and to a very extreme degree). The “smart money” is neutral. The $VIX continues to diverge negatively from price. This doesn’t seem like a recipe for higher prices. My advice: Remain patient!

The Sentimeter

Figure 1 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 1. The Sentimeter

Dumb Money/ Smart Money

The “Dumb Money” indicator (see figure 2) 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 2. The “Dumb Money”

Figure 3 is a weekly chart of the SP500 with the InsiderScore “entire market” value in the lower panel. From the InsiderScore weekly report: “With insider transactional volume seasonally slowing, market-wide insider sentiment has moved into Neutral territory. Trading volume will continue to wane over the next few weeks as the closure of company-specific trading windows limits insiders’ abilities to transact non-10b5-1 trades and adopt new 10b5-1 plans. “

Figure 3. InsiderScore “Entire Market” value/ weekly

Rydex Asset Data

Figure 4 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 79.45%. The indicator has crossed above 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 4. 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 33.36%. It was only 2 weeks ago that the indicator hit its lowest value since 2001 suggesting little firepower on the sidelines!!

Figure 5. Rydex Buying Power/ weekly

$VIX

Figure 6 is a weekly chart of the SP500 with the $VIX in the lower panel. While price action has moved higher, the $VIX has failed to break a value of 12. Price continues to diverge negatively from the $VIX.

Figure 6. $VIX/ weekly