Weekly Sentiment Review

The market remained choppy last week, and sentiment remained quite bearish. The indicators point to a market characterized by a high degree of pessimism among investors. Some recent examples include:

• The Specialist Short Ratio remains at 40-year lows (0.15)
• Bears on the AAII survey have matched or exceeded bulls for 8 of the last 9 weeks
• The 10-day ISE Sentiment index hit 135, the lowest level since September 2004
• The 21-day CBOE equity put/call ratio moved above 0.70, an elevated level

I think that the longer this bearish sentiment builds, the higher the market will eventually have to climb before all of these bearish bets get unwound. This is an important point, and one that I debated recently with my colleague (Doug Kass) on Street Insight.

Doug argued that the "sentiment trade" was too easy, because everyone could see it, and thus it would not help buoy the market. I don't believe that to be the case. While you might be able to make this argument for the investment advisory surveys, the indicators involving things like put/call ratios and short interest represent real bets made in the market, with real money on the line - not just opinions.

Only time will tell which way things will play out. But I have seen this movie before, and history tells us that the odds favor my thinking. The market loves to climb a "wall of worry", and I think a substantial one is presently being built. At least...that's how I see it.