I wanted to take a step back today and look at intermediate term sentiment. Unless there is a major economic event most large moves lower tend to occur from a state of extreme intermediate term sentiment.
The Investors Intelligence survey is an excellent intermediate term sentiment indicator. Below is a graph from Bespoke Investment Group, with my labels, showing the level of bears on the Investors Intelligence survey. The danger zone seems to be when the bears are below 20%. We are not quite there yet. As an aside please note the high level of bears we saw in late August right before this rally kicked off.
SentimenTrader.com. We are nowhere near the upper band but I would note that pre-2009 the current level was considered pretty extreme. This indicator is inconclusive. I would once again point out that at the kick off to the current rally at the end of August we were sitting at the lower band.
Overall what we are seeing is that sentiment is not quite at an extreme in the intermediate term. That does not mean we should not see corrections. But it does mean that it is unlikely we see a move lower similar to the one in April, short of a systematic event.