Investor Sentiment Check

I continue to hear people say that investors are too complacent currently. Huh? The S&P has declined in nearly a straight line since peaking on May 19th. That selling isn't a reflection of people having a rosy outlook.

I also hear them cite indicators like the VIX, which is well below the March highs. But the VIX doesn't have to make a higher high during every correction. The March bottom was a scary event, that resluted in a crescendo of fear. The current pullback is more garden variety.

But the market is sufficiently oversold here, and ripe for a bounce. Also, the majority of investor psychology indicators that I follow are deep in negative territory, highlighting pervasive bearish sentiment:

• The bull/bear spread in the Investor's Intelligence survey is -1%, a rare event; moreover, Merrill Lynch looked at the 5-week moving average and said that when it is this oversold, the 3-month historical return for the market is +11.5%
• The bull/bear spread in the AAII survey is -13%, and has been negative for 3 of the last 4 weeks
• The Ticker Sense blogger poll has also showed more bears than bulls for 7 consecutive weeks, the longest stretch since its inception
• The Public Short Ratio on the NYSE is a a new high of 73% (I cannot find another reading higher than this)
• The 10-day put/call ratio is very elevated at 1.01; it has been higher during steep selloffs, but even at these levels, bearish sentiment prevails
• The Rydex Nova/Ursa ratio of money flowing from bullish funds into bearish funds has had a steep decline, and is now back to levels seen during the March lows

I have said before, that sentiment in and of itself can't make the market bottom. It is but a secondary indicator. Price and volume action on the major indexes come first. But if we can get a rally in the market for any reason, then the buildup of bearish sentiment often adds upside fuel to the fire as these bearish bets get unwound.

Now all we need is a big catalyst for a rally!