Up or down?  Does the smart money know?

I hope everyone enjoyed their weekend.  Mine was short but very relaxing and I did something I don't normally do;  I completely forgot about the market.  I had to go back to the charts to remember what was going on.  That's a good thing as it cleared my head some. 

Last week I showed you the AAII Investor Sentiment Survey which is a survey from people we call, for lack of a better term, the "dumb" money.  I like to view the sentiment of "dumb" money with the preconception that they, while not always wrong, tend to lean the wrong way near market extremes.  We didn't get much of a read from them as it was basically a neutral reading overall.

Today I will look at three sentiment type surveys / indicators from the other side - the "smart" money.  These are taken from some of the more savvy investors and traders on Wall Street.  While we like to go against the dumb money, we do like to pay attention to what the smart money is doing.  Unfortunately the three charts I have to show you won't help us much in determining what they are thinking.

The first one is the OEX put/call ratio.  This is a very solid indicator that tells us what the OEX options traders are doing.  Most options indicators are contrarian (we do the opposite of what they do) but this options put/call ratio is the one options indicator that is not.  It is considered smart money and we pay attention to them.

You can see below that the 10-day moving average of this indicator was telling us that these traders were very bullish at the beginning of the year.  Because I don't like to use one indicator to determine my allocation, I made the mistake of ignoring their extreme bullishness in early January and of course we saw a very strong rally.

                                   Chart provided courtesy of www.decisionpoint.com

It has come well off the bullish reading but right now the OEX 10-day moving average is at 1.20, about as neutral as this indicator gets. Not much help here for us.

The second chart I'll show you comes from sentimentrader.com.  This indicator is actually a compilation of many indicators that give a percentage of how bullish or bearish both the smart and the dumb money are currently.  Right now the smart money is at 58%.  60% is considered a buy signal BUT is only useful when the dumb money is below 40%.

February 10, 2006 Smart Money Confidence:  58%   Dumb Money Confidence:  54%

                             Chart provided courtesy of www.sentimentrader.com

Based on the above chart, the dumb money is not really close to 40% so both the smart money and the dumb money are closer to being more bullish than bearish.  Again, this is kind of a wash and not really much help to us.

The last chart is the Wall Street Sentiment Survey, which unlike the AAII Survey, is taken from a more savvy group of traders and more likely to be correct.  This one does show us something...


                                    Chart provided courtesy of www.decisionpoint.com

The bearish percentage is 56% which is the highest bearish reading on the chart (which only goes back to August of 2005.)  Three of the last four times this bearish reading hit 50% or higher, the market either paused or pulled back a fair amount.  That is somewhat of a help to us. 

So we have three separate charts trying to tell us what the smart money is thinking and we are not getting any real consistent answers.  Perhaps this means the market will just flounder for a while until we get more clarity from our new Fed Chairman.  It could be a time to buy the short term oversold conditions and sell the overbought conditions.  I've been avoiding that because of the recent mid-day swings we have been seeing. 

Right now the market is leaning toward overbought so a rally here would be a sign of strength.  Any weakness at this point would probably mean more of the same - pullbacks after rallies, and bounces after drops.

I won't venture any short term guesses at this point since things seem to be changing from hour to hour.  I do still believe the market is in repair mode for a while longer so I am staying put in the G fund for now.

That's all for today.  Currently 100% G fund.  Thanks for reading.  Subscribers: if you didn't see, the new TSP Timing Newsletter is available in the members' area.
 

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