Weekly Sentiment Check

Checking the weekly sentiment indicators shows that there is still mounting levels of pessimism in the market. Most of these indicators are at levels that are usually associated with meaningful bottoms.

Of course, some of these indicators have been flashing extreme bearishness for a little while, so what gives? The answer is that sentiment indicators are still secondary measures of the market. Our primary tells remain the price and volume action of the major indexes. To wit, when the market was unable to post a strong follow-thru day to the last rally attempt in late May, it told us that this correction probably needed more time to play out.

Moreover, often times when sentiment indicators begin to flash bearish signals, it still takes a while for the market to bottom. And there can be some days of panic selling in the interim. I think that is what we saw on Thursday, when volume spiked through the roof, and the indexes posted major upside reversals into the close.

When the market does turn, the build up of bearish sentiment helps propel the market higher as those bets continue to get unwound. So here is where some of the indicators stand:

• The Investor's Intelligence bull/bear survey is down to +9 (40% bulls, 32% bears); that's the lowest level since 2003
• The AAII survey is -19, and has been negative for 4 straight weeks; the last time that happened was May 2005, before a meaningful market rally
• The Rydex Nova/Ursa ratio fell to 0.10; the lowest in years
• The 10-day ISE Sentiment Index fell to 112, the lowest since I have been tracking it

So that is a pretty strong list of indicators on the same side of the ledger. After the strong market action last Thursday, we now need to once again look for some follow-thru action this week.

I am still net long, and will be looking to increase my long exposure on further strength.