Sentiment Review

Despite the fact that the market hit a new high only 2 weeks ago, and the subsequent pullback has been relatively shallow, I am already seeing signs of building bearish sentiment.

It isn't near peak levels, but it is starting to grow. If the market pulls back further into the late August/early September time frame, I could envision a scenario under which bearish sentiment rises further, and helps solidify a nice trading bottom. Here are some of the signs I am watching:

• The bull/bear spread on the AAII survey fell to +11 (40% bulls, 29% bears), and could move back into negative territory (like in April/May)
• The bull/bear spread on the RealMoney survey fell to -30 (21% bulls, 51% bears), due to a huge spike in bearish sentiment
• The 10-day CBOE put/call ratio is back at 0.99, an elevated level (tradeable bottoms often coincide with readings above 1.00)
• The Specialist Short ratio is still at extreme low levels (0.18), indicating there is still a lot of shorting taking place by joe public

It is too early to try to time a near-term bottom at this point, but things are beginning to take shape. I would not be surprised to see some sort of failed rally attempt, followed by an additional selloff, to bring more bears out of hiding. I would then look to add to recent market leaders that should continue to be strong into year-end.