Public Pessimism and Professional Optimism

     First of all, I want to admit that my April 21, 2011 blog, a speculation about the possible formation of a cup and handle, obviously did not develop as I had hoped. In fact April 30 was the top of the market. The potential cup and handle was in reality a double top in the process of forming. Now I am going to venture to propose another potential bullish scenario evolving out of the recent market decline. This letter makes reference to William Schmidt's TigerSoft system as well as to the Dow Theory.
      Perhaps we can view the weakness in public buying as a contrary indicator, like new highs in the odd-lot short selling to purchases ratio. At bottoms, the public tends to be bearish and they don't become bullish until the uptrend is well under way. Under the Dow Theory, the first psychological phase of a bull market is where informed money in strong hands comes in to buy and the public is still afraid of the market. This corresponds to professional and insider buying in the TigerSoft system. In the second psychological phase the public joins the informed money (and professionals) in buying. Economic news tends to improve in the second phase. In the third, speculative phase, the public becomes the main driver of stock prices as professionals and informed money accumulate less and distribute more. If we are in the first phase of a mini-primary bull market, the TigerSoft Accumulation Index should grow stronger as insiders join the professionals.
     The weak link in my analogy is that while professionals are bullishly buying, the corporate insiders, as measured by the TigerSoft Accumulation Index, have not yet decisively done so. They correspond to the "informed money " under the Dow Theory. Of course, I really think that this is all taking place on a miniature scale; realistically the best we could expect would be an intermediate term rally coming out of a sharp correction which could be called a mini-primary bear market. My small cap mutual fund declined about 25%, which is over the 20% threshold that many analysts use to demarcate a bear market. But the sharpness of the decline as well as the terrible surrounding economic news has been enough to generate these "cyclical" psychological dynamics which the Dow theory describes and Tigersoft  indicators measure.