All the evidence I look at has me reaching the same conclusion. Investors as a group are underweight stocks and pessimism is extreme. At the same time corporations are repurchasing shares at an aggressive pace and there is some cash M&A as well. This type of setup is extremely bullish in the intermediate term. The problem is that Europe has the potential to be another Lehman Brothers if Greece is allowed to default and the dominoes are allowed to fall. We have a normally very bullish setup with a potentially very nasty trap door.
No matter which sentiment indicator I look at all I see is pessimism. The ISI hedge fund survey shows hedge funds at their lowest net long positions since 2009. The NAAIM survey of investment mangers shows similar positioning for investment managers. Short interest is at 2009 levels, put buying has been extreme for the better part of the past month, while futures traders are net short according to the COT report. Everything I hear anecdotally tells me there are few bulls out there as well.
When a professional investor is underweight their benchmark, it is the same as being short once the market begins to rally. I believe we could see a very serious performance chase even if Europe only manages to kick the can. When I think about this setup it makes me want to be leveraged long. When I hear German authorities speaking publicly about planning for a Greek default it makes me want to find a bunker. As a result I am neither leveraged long nor in a bunker. I am conservatively long so that I can profit if Europe finds some sort on non lethal solution, which I believe to be the most likely outcome. But I will also be able to survive another Lehman Brothers if that is the road Europe decides on.