The latest reading from the American Association of Individual Investors (AAII) which measures sentiment of retail investors shows 38% bulls, 42% bears. Recall 2 weeks ago when I warned about bearishness getting excessive signaling an immanent snapback rally. This was because AAII showed about a 2:1 ratio of bears over bulls.
So now, despite a massive rally back to the June highs, with some indices such as the NASDAQ breaking out to new highs bulls have risen and bears have fallen but only very slowly. We are still seeing bears outnumber bulls indicating the sticky skepticism that continues to exist ever since the March bottom. The same goes with the other sentiment measure I follow - Investor's Intelligence, which is a measure of newsletter sentiment. It too is showing sticky skepticism with a current bull/bear ratio of 1. Therefore, the way sentiment is behaving has longer term bullish implications or at the very least indicates that any downside in the market should be contained for now.
I said prior that we may be setting up for a situation similar to March 2002 if certain things fell into place. One of those pieces of the puzzle was sentiment and so far no dice there. The other pieces are the Rydex ratio which is getting there but not there yet and the VIX which is also getting there but no there yet.
Bottom line: Market is ST overbought, vulnerable to profit taking, but with the NASDAQ breaking out to YTD highs and SPX just about to join with no excessive bullish sentiment there is still upside potential that needs to be respected. Yes, I know we won't go up everyday forever, but for the market to have any meaningful downside potential (i.e. greater than 5%) we need to see sentiment get giddy again.
This is the type of market whereby it's too late to go long but too early to go short unless you day trade. I fucking hate when this happens!
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