Introduction

We are beginning to see signs of a market top. Most likely, this is an intermediate term top, and I don’t think it represents THE top. A pull back or consolidation period has begun. Buyers are lurking.

Our equity model, which is built around the “dumb money” indicator (see figure 2 below) remains bullish, and will likely remain so for another 2 weeks or more. This current trade has gone on for 14 weeks now when we became bullish during a period of extreme investor bearishness, and it is our expectation that this trade should last on average 15 weeks. The best, most accelerated gains typically occur in the beginning of the trade. Just when investors typically get the all clear, the trend will flatten out. This is the phase we are in now. Our plan is to become sellers of equities when investor sentiment unwinds, but we are not at that point, and I doubt we will be there until 2014 as the calendar is on the bulls’ side.

Specifically, this week is the last FOMC meeting of the year, and as we explained in “It’s Not In Their DNA”, the Federal Reserve doesn’t have the will to tank the markets especially before the Christmas holiday. It’s possible, but I just don’t see it happening. Taper talk is just that –it’s talk and not action. Even if the equity markets do sell off, the slow Christmas holiday and expectations for the New Year should find willing buyers at lower prices. This will be the opportunity to “put that money to work” as “money is on the sidelines ready to come into this market” or some stupid dogmatic, bullshit like that.

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From a technical perspective, many issues (see this week’s Video of the Week) have lost their mojo. In particular, many issues are beginning to show a clustering of negative divergence bars, which has been a reliable sign across multiple asset classes of slowing upside momentum and of a market that should go sideways at best or lower. The $VIX is moving higher and has broken above resistance levels at 14.64. The indicator used to capture this dynamic (see figure 6 below) has rolled over implying lower prices. I discussed the implications of this HERE. These are all bearish signs.

In summary, there are bullish signs and bearish signs. The end of the year shenanigans is bullish. The bearish signs are telling us that we are closer to the end of the rally then the beginning. Our equity model remains bullish, but it is clearly getting late in the game.

As a reminder, we have moved our stop loss up to SP500 1706.92.

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 but heading towards bearish (as in too many bullish investors).

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 extremely bullish.

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 sentiment has moderated, moving from a Strong Sell Bias to a Sell Bias, as transactional volume has declined. The drop in non-10b5-1 selling is, in part, attributable to companies beginning to close quarterly trading windows. The drop in 10b5-1 selling, especially new plans, is likely the result of stocks having traded in a fairly tight range over the past few weeks. The Healthcare and Materials sectors continue to show Strong Sell Biases, but sentiment has moderated elsewhere, most dramatically in Technology, Financials and Energy. With three weeks left in the quarter, transactional volume should continue to decline as more companies close trading windows. Assuming we’ve already seen peak transactional volume for the quarter, selling in Q4’13 was elevated but not historically so, and considering the strong market backdrop (indices at all-time or multi-year highs) the volume of selling was not unexpected. “

Figure 3. InsiderScore “Entire Market” value/ weekly