Tuesday, January 17, 2006

Sentiment Review

Recent sentiment indicators reveal an uptick in bullishness. This is one of the reasons, in addition to the current overbought condition, that I have moved to a bit more cautious stance on the market.

I use sentiment as a secondary indicator. My primary indicator is the price/volume action of the market and leading stocks. But I do pay close attention to sentiment. I have found that extreme bearish sentiment is better at identifying bottoms, while extreme bullish sentiment can persist for a while as the market continues to push to new highs.

That said, here are some of the indicators that currently give me pause:
  • The bulls on Market Vane hit a multi-year high at 73%
  • The bull/bear spread on AAII moved up to +40%, an elevated level
  • The Rydex Ursa/Nova ratio has moved back up to 0.24
  • The 10-day put/call ratio has moved down to 0.72, its lowest reading since November 04

As such, bullish sentiment is signalling caution here. I would like to see more bearish sentiment works its way back into the market. Unfortunately, this usually only occurs after a correction. The market has not flashed much distribution lately, but we need to stay alert to this possibility, and maybe raise a little cash.


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