Weekly Sentiment Review

Although the market looks like it is trying to bottom, the indexes posted another week of losses last week. The fact that this market has been increasingly volatile, and has not yet broken out on the upside, has many participants remaining in the bearish camp.

I am now hearing more people say things like the bull market may be over and another bear market underway. Barron's ran a piece this weekend about this very possibility. But I have stated here before that it would be the first time that the market put in a top with bearish sentiment so high.

Let's look at some of the indicators:

• The bull/bear survey in Investor's Intelligence is +0 (35% bulls, 35% bears): it is rare for there to be as many bears as bulls. In fact, it has not happened since October 2002, the peak of the bear market.
• The bull/bear survey in AAII is -7 (34% bulls, 42% bears): this survey has shown more bears than bulls for 6 consecutive weeks, showing a steady build in bearish sentiment
• The Rydex Nova/Ursa ratio has fallen deeper into bearish territory, at 0.07: assets continue to flow into bearish mutual funds; this is the lowest since I have been following the ratio. Does anyone know if it has ever been lower?
• The Public Short ratio hit a new record high at 64%: this confirms the huge levels of short interest out there, dominated by hedge funds
• The put/call ratios are off their recent peaks, but still at the top of the ranges flashing extreme bearish levels: This is another indicator showing how many bearish bets are still on the line

Again, as long as the shorts are making money, they will continue to feel emboldened. Moreover, they have shown the ability to knock the market down and kill most rally attempts. At some point, this strategy will fail and the bulls will regain the offensive.

If and when the short contingent begins to see losses and feel some pain, I think there can be considerable short covering. But first we need to see some strong rallies accompanied by high volume.
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