Weekly Sentiment Report: Is There Another Rabbit in the Hat?

Weekly Sentiment Report: Is There Another Rabbit in the Hat?

Does the Federal Reserve have another rabbit to pull out of the hat?

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Several weeks back, we noted that the “smart money” was bearish on the markets, and that higher equity prices would see even more selling extremes amongst corporate insiders. As we look at the data this week, this is exactly what has happened as the “smart money” indicator is at its most extreme degree of selling since November, 2010. See figure 1 below.

So is the “smart money” really that bad? Looking at figure 3, we have highlighted the extremes in selling by the “smart money” since November, 2010. Despite the two misses as outlined above (and these were big misses), the “smart money” indicator has done a decent job at identifying intermediate term tops. The common denominator as to why the “smart money” indicator has failed is quantitative easing or perceived market intervention (i.e., jawboning) by the Federal Reserve. So this begs the question: Does the Federal Reserve have the ability to pull another rabbit out of the hat?

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The “Dumb Money” indicator (see figure 5) 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.

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