A quick change in sentiment

I should have known.  It's never a good idea to base your market decisions on one indicator but when "the herd" became suspiciously overly bearish to start the new year, I should have taken that as a sign to stay in stocks a bit longer.   

Early last week we were discussing how the herd was getting bearish even with the S&P 500 was just off multi-year highs.  As a contrarian investor, I like to go against the herd, but this was odd behavior.  If you recall I was wondering if it may have been a misprint that 40% of those polled were bearish in the AAII Investor Sentiment Survey, and just 29% were bullish.  Not surprisingly, the market went against the herd and rallied strongly.  Unfortunately I was part of the herd. 

Now the herd has done an about face.  In Wednesday's new AAII Survey, 59% of those polled were now bullish, and only 19% were bearish.  That's just over a 3 to 1 ratio and that usually means at least some short term trouble for the market.


                                   Chart provided courtesy of www.decisionpoint.com

The last couple of times we saw the 3 to 1 bulls to bears ratio, the S&P took a four to five week rest. 

Yesterday's selling is certainly not anything out of the ordinary during a bull market so the bears can't claim victory just yet.  I have to admit I completely underestimated the strength of this market and I am rethinking just how severe any pullback might be.  I was thinking we could see a 10% or 15% drop but now I have my doubts that it will be that severe.  I will just watch the indicators more closely and stop trying to predict targets.  Right now the market is overbought but a couple of days like yesterday could put the indicators quickly back to neutral.

The bond market finally bounced back after a rough couple of days.   The trend is still up but we'll want to see a move toward 115 on the 30-Year bond to keep us interested.  A move below 113 would be bearish for bonds.


                                   Chart provided courtesy of www.decisionpoint.com

The G fund should pay its penny gain on Tuesday so if bonds remain positive, I may go to 100% F fund for next Wednesday.  That is assuming nothing out of the ordinary happens in the stock market in the interim.

That's all for today.  Let's see if this pullback continues or if buyers step up to the plate to pick up bargains.  RevShark still seems to think that many investors missed this last rally (I resemble that remark) and that they will be quick to jump in on weakness.  Currently 50% G, 50% F.  Thanks for reading.  Have a great weekend.