If it felt like investors were gloomy yesterday, it was because they were. Rydex traders greatly increased their short positions yesterday. They are now positioned about as negatively as they were last Summer. Sentimentrader.com put out a study yesterday, using the COT report, showing that small speculators have their lowest long position in the indices ever. Add to that days upon days of put buying and a very bleak picture of investor sentiment emerges. The good news is that it cannot get much worse.
It looks like we will get a large gap up at the opening as Europe is doing well for a second day in a row. While I did not see yesterday's fade coming I do not expect a repeat performance today. That does not mean the bears will not try at some point. The reason I expect today's gap to hold is that market participants are already positioned so negatively that its hard to see where the selling comes from. We could see more liquidations but that is a catalyst that is difficult to predict.