Sentiment is about as negative as it gets. I can lay out dozens of indicators pointing to this but I don't believe many would argue with this statement. While sentiment is supportive of the market there are risks. The major downside risks are continued redemptions and liquidations and/or a systemic event.
I view a systemic event as unlikely in the near term. The EFSF is 400 billion Euros or about $550 billion dollars. There are also IMF bailout funds in place as well as asset purchases by the ECB and other liquidity facilities available. At minimum, the $550 billion EFSF is a large kick of the can. I would point out that for months the market thought TARP would not be enough, yet TARP was more than enough as most of it went unused.
I believe the cycle of redemptions and liquidations is the bigger risk to the market. There are news stories of redemptions and liquidations and the price action seems to support this. Last week a group of momentum stocks fell 10% on no real news. Where there is smoke there is fire.
While it is difficult to know when this vicious cycle will end I believe that it will provide opportunity as we should see a snapback when it does. As such I will be adding exposure on a scale if we melt lower. While I have been trading around a net long position,I have held myself back from becoming aggressive on the long side. Further meltage would get me aggressive.