Sentiment Models Going to More Bearish Extremes

Since my recent post on Sentiment Models Pointing to a Rally in US Equities, the S&P 500 has descended 6.4%. Investor sentiment has gotten even more bearish, which is bullish from a short-term viewpoint.

A check in with AAII shows that individual investor sentiment has become bearish and readings are virtually off the charts. ISEE, which calculates a call/put ratio that only uses opening long customer transactions to calculate bullish/bearish market direction, shows similar extreme levels of investor bearishness.

The accompanying chart shows the large speculator, or fast money, position in the NASDAQ 100 futures, a high-beta instrument that they often use to make directional bets. The fast money crowd has raised their shorts the in the NASDAQ 100 since the last update and readings are definitely in the crowded short zone from which the market has rallied in the past.

However, the recent break of the S&P 500 through the long-term trend line is a worrying technical sign. To technicians, this is an indication that the uptrend in the stock market is broken and we may be in a bear market or at least a sideways consolidation pattern.

My conclusion: The market will likely rally hard but don’t count on the bull market of the last few years to continue.