As of yesterday's close the Smart Money indicator from Sentimentrader.com made another sharp drop and is now at its lowest level in over 2 years and is at levels last seen in late May 2007 as the bull market was approaching its final highs. Remember that this is a real money gauge, indicating that the Smart Money is showing increased aggression against a further advance in stocks. The Dumb Money Indicator remains elevated to near bear market highs, and the Smart to Dumb money spread is also right near bear market highs.
Additionally, on a technical note, the S&P made a third attempt at new highs above the January 2009 highs yet reversed. From experience and reading on this type of action, a 4th advance above the highs would likely have a bullish resolution, but any decline below last week's low without a 4th push will likely result in major further downside in the next 6-8 weeks.
In sum, from both a sentiment and price pattern perspective this is easily the best bearish topping set-up to enter short/inverse trades that we have seen during this rally. While it will take some downside to "confirm" the bearish reversal, I believe the risk to reward is the best right now. Looking out 2-3 months from now, I would gauge there is a bare bones minimum of 3 times the downside risk versus upside potential, but realistically it is probably closer to 6 or 7 to 1, and if yesterday was the high of the rally then probably 10 or more to 1.
I feel it is imperative to continue to take bearish set-ups for short and intermediate term traders and also to maintain the current BGZ blog trade for the time being.
Pete
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