Leeson on Friday pointed to his firm’s crowd sentiment poll, which recently clocked in at “extremely optimistic” levels. Chart watchers often consider sentiment to function as a contrary indicator, one that can presage overly enthusiastic markets that are ripe to turn lower.Yesterday, I also highlighted a possible crowded long position from Rydex sentiment data (see My trading plan for December):
“This typically is not a great sign for the market going forward, at least in the near term,” Leeson said...
More specifically, Leeson singles out massive money flows into large-cap stock ETFs like the SPDR S+P 500 ETF (SPY) and the SPDR Dow Jones Industrial Average ETF (DIA) as a red flag. In November, all large-cap stock ETFs took in $25 billion, the most ever.
On the other hand, the latest release of the TD-Ameritrade Investor Movement Index (IMX), which tracks the equity commitment of TD-Ameritrade accounts, showed that retail investors retreated from their bullishness:
I differentiate the contradictory readings this way, on the basis of different investor constituents and time horizons:
- Fast HF money: Money flows into ETFs like SPY and DIA reflect the commitment of hedge fund fast-money first and retail funds flow second;
- Fast retail money: Rydex sentiment measures how the individual swing trading community is behaving; and
- Patient retail money: TD Ameritrade IMX is more reflective of the behavior of the slower, patient individual investor.
I interpret these readings as the stock market looking a bit overbought in the short-term and may be in need of a pause, but, as the mom-and-pop retail investor isn`t all-in yet, stock prices have more room to rally on an intermediate term basis.