Monday, April 18, 2011

Stock Investor Sentiment: The Bulls Love This Market

The number of bulls continue to increase as the “dumb money” indicator approaches extreme levels.  I am not sure what these investors are seeing, but we do know that higher prices will bring out the bullish instincts.  Putting our own emotions aside and looking at the data, extremes in bullish sentiment this late in a bullish run are better sold (i.e., lighten up on long exposure) than bought.

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.   This indicator is barely neutral.
Figure 1. “Dumb Money”/ weekly

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