Sentiment no longer favorable in the ST

Investor Intelligence (II) figures came out today and it's not good news for the bulls. 49% are bullish while only 21% bearish. That's a bull/bear ratio of 2.3 which has bearish contrarian implications. The last time sentiment was anywhere this bullish was early June which is right about where the market topped and had a brief correction (although it took about another week or so of churning before it rolled over). This bearish evidence corroborates the bearish rydex ratio data I discussed the other day. It took a 55% rally to finally see sentiment show some excessive bullishness.

Does this mean the rally since March is over? Not necessarily and not likely. These surveys measure ST sentiment only and it could be quite possible, like in July, to see the bullish sentiment reverse quickly after only modest downside. II sentiment was showing excessive bearishness in March, July and October of 2008 but that didn't prevent the market from going significantly lower afterwards after brief counter trend rallies that followed these bearish readings. Also keep in mind were we are coming from. For about 9 months straight (July-08 to March-09) II sentiment was showing excessive bearishness pretty much the entire time except for a small pop in bullishness once in a while. Therefore, just because we are seeing signs of excessive bullishness now for only the 2nd time in 5 months doesn’t mean it’s game over for the bulls.

Like I had mentioned recently, when sentiment gets giddy in favor of the primary trend what ends up happening is a shakeout/correction to shake out the Johnny-come-latelys. We saw this last year with the bear market. Anytime it seemed utterly hopeless, the market would get a ST pop to keep the bears humble and the bull’s hopes alive. Now, I believe we are seeing the same thing on the upside and we are probably at or close to one of those shakeout periods for the bulls.

Bottom line: recent sentiment stats confirm that a consolidation/correction is immanent, if not already began. The potential for marginal upside of 1-3% is still there....sometimes you see these sorts of head fakes to the upside to really stick it to traders trying to play the downside rollover. At this time I don't believe any correction/consolidation will be deep. 960ish would be the maximum downside target for now.