I am very worried about the economy. Many of the imbalances that have not mattered are starting to matter. The Eurozone is on the brink of collapse, while the US economy is slowing and the government is handcuffed as their is little political will for stimulus. Not to mention the negative feedback loop that negative sentiment can cause.
Now that readers understand that I am not a wild eyed optimist I want to explain why I believe that in the short run the bull case is more attractive to me. Some of the biggest, most powerful rallies occur in the context of bear markets. Rarely does the market go down in a straight line, especially when so many people are betting that way.
The chart below from SentimenTrader.com shows how aggressive traders at Rydex are positioned. They have not been positioned so negatively since last Summer, which turned out to be an excellent buying opportunity. Options ratios and investor redemptions from mutual funds are showing similar extremes that typically lead to rallies.
If the financial system falls apart than all bets are off. However, Eurozone and Fed officials have put in place some extreme measures to keep that from happening. If the system can hold itself together than I believe that the market will squeeze out the newbie shorts and give us better levels at which to sell.