Introduction

If you read the financial press, the market slide that has occurred over the past 3 weeks has been described as “huge”, “horrific” and a “saga”. Really? I am sure those who were buying the “Kool-aid” at the market highs feel that way, but the numbers tell a different story.

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From the closing high 5 weeks ago to Friday’s close, the S&P Depository Receipts (symbol: SPY) have lost 3.6%. Huge? Horrific? Hardly!! The PowerShares QQQ Trust Series (symbol: QQQ) is down 7.1% from its closing high, and the i-Shares Russell 2000 (symbol: IWM) is down 7.7%. Even if you were dumb enough to buy at the highs, these losses are nominal, and prices in all 3 issues remain above their much watched 200 day moving averages. I am sure this line on a graph -i.e., the 200 day moving average — is good for a bounce of some kind. So calm down everybody.

Yet, as we have been saying for months, lower prices should be desirable if you are an equity bull unless you are over leveraged and out of buying power as appears to be the case at most market tops when investors are caught by surprise. Judging by the whining and complaining and the utter surprise that the equity market doesn’t always go higher, investors must have been buying with leverage. In any case, lower prices are just a healthy part of any bull market — except this one. Lower prices are the “pause that refreshes”, but over the past several years, market sell offs have been very limited as investors have anticipated that the Federal Reserve will come to the rescue with some sort of asset purchase program (real or perceived) to support the markets. But this time appears to be different. Or is it?

Getting back to our pundits and in this case the serial bear callers –i.e., those market watchers always calling for doomsday — we note their voices are getting a little bit louder. Comparisons to 1987 and 2000 seem to be a big new item. I am not sure this little mini-market swoon can be extrapolated into a market crash, yet continued market losses (and we should hope for continued losses) will only make the level of angst even greater. Somewhere in here (probably over the next 3 to 4 weeks), investors will turn extremely bearish on equities (i.e., they have thrown in the towel), and this will be our buying opportunity. Most likely, this buying opportunity will coincide with the Federal Reserve saying that they are going to alter the trajectory of the QE un-wind or some such nonsense to support a struggling economy. (Note: the Fed never says it is supporting asset prices although we all know that this is what they are doing.) The markets will bounce. From a technical perspective, this will create a level of support or buying. However, if that level should fail, then the bull market is likely over, and figuratively speaking, markets participants will no longer have belief in the magical powers of the Federal Reserve. The markets will fail when the Federal Reserve fails. This is what will herald in the next bear market.

So this time isn’t really different, and it never is. Investor sentiment (as seen by our “Dumb Money” indicator, figure 2 below) is neutral. These investors need to turn extremely bearish to create our next buying opportunity, and the best way to get there is to have lower prices. Anything short of this will produce a noisey, range bound market. If that buying opportunity does present itself, then it will be the success or failure of that bounce that will be the important market tell. The bull market ain’t over yet. There are many reasons (i.e., valuations and length of time) why this cycle should end, but I suspect we need to kill the notion that the Federal Reserve has removed all risk from the equity markets. The only way for this to happen is to have the markets fail after the Fed blinks and comes to the rescue.

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: “ Market-wide insider sentiment is Neutral as insider transaction volume is seasonally low. Trading volume will remain very low 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. Volume will rise in late April/early May as companies begin reporting Q1’14 results.”

Figure 3. InsiderScore “Entire Market” value/ weekly