A useful gauge of market sentiment that is based on what bears and bulls are *actually* doing, rather than on their stated leanings is the ratio of assets in Rydex bear and bull funds. A related set of measures tracks the flows of funds (cash flow) in and out of the bear and bull funds. Carl Swenlin of Decision Point does a great job of tracking these numbers.
What we find is that the ratio of bear and money market assets to bull assets is 1.16. Since 2004, intermediate-term bottoms in the market have all seen ratios greater than 1.0 but less than 1.5. Interestingly, this measure hit a very elevated reading of approximately 3.0 at the important cyclical market bottom in March, 2003. Thus, while the current readings are elevated as might be expected during a normal correction in a bull market, they are not the stuff of which bear market bottoms are made.
The Rydex cash flow measures show lower peaks for the bull funds and rising peaks for the bear funds, meaning that, with each market advance during much of 2005 and 2006, we see less money put into the bull funds. With each market decline, we've seen more money put to work in the bear funds.
We saw more rangebound action on Tuesday, but nothing to change the downward short-term trend. The number of stocks making new 20 day highs was 331; the new 20-day lows were 1748. We need to see sufficiently broad rally action to lift stocks off these lows before a bottoming process can commence. The last two days of consolidation have not provided that broad strength.
On another front, we see 30% of S&P 500 stocks trading above their 50-day moving averages. As noted earlier, readings below 20% have characterized intermediate-term market bottoms in the past several years.
I'll be returning to the Trading Psychology Weblog on Friday with a full update of market stats.