Weekly Sentiment Review

It doesn't surprise me that just as the market looks like it reached a bottom this week, the sentiment indicators are showing extreme levels of bearishness. And I mean extreme.

As sometimes happens, the first signs of heightened levels of bearishness a few weeks ago were just initial warning signs. But as the market melted down further than most expected, bearishness rose to levels that are often seen at market bottoms. When market technicals then also became extreme oversold, the ingredients for a bounce were in place.

Let's look at some of the indicators to illustrate how bearish sentiment is right now:

• The bull/bear spread in the Investor's Intelligence survey fell to +4 (39% bulls/34% bears); this is the lowest level since 2003
• The AAII spread fell to -29 (26% bulls/55% bears); not only is this the 5th consecutive week with more bears than bulls, but there has only been three other times in the last five years that bears have topped 50%. Those were: July 2002, October 2002, and February 2003. Do you remeber those dates?
• Bulls on Market Vane also fell to 55%, their lowest level since 2003
• The Rydex Nova/Ursa ratio hit a new low (0.08) since I have been tracking it; signaling a peak of fund flows into bearish mutual funds
• The Public Short ratio (including hedge funds) has been at a record 61% for three straight weeks; this means there could be lots of short covering on further bounces
• The 10-day put/call ratios are still near record levels (1.11 on CBOE, and 0.90 on ISE)

Those strategists that are saying that the market has topped are mistaken. I don't think the market has ever topped with sentiment this bearish. That's just not how it works. At market tops, everyone is bullish. Then, as the market begins to slide, those same investors are complacent and view it as a buying opportunity. That is how the market continues to slide down a 'slope of hope'. I don't see that now.

We'll take it one step at a time. For now, I am looking for some strong follow-thru action this week. Then we can start discussing how long this bounce can last, and what might be in store for the remainder of the year. But right now, I'm bullish.
'