Weekly Sentiment Review

As I have written about recently, we are quickly entering a period where bearish sentiment is building. I think that many investors have heard how the Aug. - Oct. timeframe is one of the worst seasonal periods for stocks. As such, traders have piled into bearish bets, added puts to hedge their positions, increased short selling activities, purchased bear market funds, etc.

The pressing of these bets has helped pressure the market recently, but if further downside fails to materialize, I would anticipate that as these bearish bets get unwound it could add some serious upside pressure to the market.

Here is a look at some of the indicators I follow that are pointing to a rally:

• The bull/bear spread on the AAII survey fell to -11 (29% bulls, 40% bears); this spread hasn't been in negative territory since
• The bull/bear spread on the RealMoney.com survey fell to -26 ( 23%bulls, 49% bears); this is the 3rd consecutive week bears have outnumbered bulls, suggesting extreme bearish sentiment
• The 10-day CBOE put/call ratio is hovering just under 1.0; this is an elevated level, often a precursor to a rally in the market
• The Rydex Ursa/Nova ratio is back down to low levels at 0.18; this indicates more money is flowing into the bear market funds
• The Specialist Short Ratio is all the way down to 0.16; there is enourmous short interest in the market, and short-covering rallies are becoming more and more likely.

Additionally, a look at both the oscillators and stochastics on the indexes shows that the market is short-term oversold. So we have a nice combination of oversold technicals and oversold sentiment (so to speak) that are gelling at the same time.

Market Comments: I will look to use any weakness this week to materially increase my long exposure to the market. I expect at least a tradeable pop in the market, although I cannot rule out at this time that the market will trade lower after that, and possibly put in a lower low. But one step at a time. I am putting together my buy list of strong, market leaders that have merely pulled back due to overall market weakness (as opposed to broken stocks).