Investor Sentiment

Investor sentiment is just a reflection of investors’ opinions about the market, and it is investors who make the market.

At present, investors are viewing the markets unfavorably, but their opinions are by no means extreme.

I have often contended that there are two ways to interpret sentiment data.

It was touch and go this week, but in the end and as suspected in last week's comments, the "this time is different" scenario will not play out.

The markets don't have to go down just because everyone is bullish, but if you are a "believer" and buyer at these levels, then you will need to identify a market top and get to the exits before the next guy to extract profits. This is a very crowded trade and identifying the top is a tall order.

If you don't want to assume that responsibility of managing risks, then you should be a buy and hold kind of investor.

It was only 2 weeks ago that the "dumb money" indicator and Rydex market timers were bullish to an extreme degree and company insiders were selling shares at a clip that had not been seen in 4 years.

If the market hasn't topped out already, it should do so within a couple of percent of the recent highs. Rallies should be sold and stops tightened up. The market is prone to sudden sell offs. There will be better risk adjusted opportunities to buy in the future.

With the sentiment indicators turning neutral, stocks will no longer have short covering to propel them higher. This puts the onus on the bulls - it is time to put up.

Buying conviction remains a big question as volume was the lowest total for any week since Christmas, 2009.

What has been missing from these signals is a lack of follow through.

Charting this market is similar to tracking the moves of a squirrel crossing a busy street.

Without buyers stepping in, extremes in bearish sentiment will be just that - extremes in bearish sentiment.

Short covering is unlikely to be the fuel that propels prices higher.

Investors remain bearish, and buying into last week's weakness continues to be the right play -- so far. However, a positive outcome is far from certain especially since there is an apparent lack of conviction amongst the "smart money".