A Mixed Picture

It has been hard for me to gauge sentiment recently as indicators have been all over the place. The shorter term gauges are pointing towards investor optimism while the intermediate term gauges are pointing to more cautious investors.

I have cited Rydex traders as showing too much optimism in recent days but it also seems that short term newsletter writers have turned optimistic, especially on the Nasdaq. From Marketwatch:
According to the Hulbert Financial Digest, the average recommended exposure levels among these timers is now 106 percentage points higher than where it stood a month ago. This is 12 percentage points higher than the week-ago level, even though the Nasdaq Composite Index is lower today than then.

Many of the intermediate term indicators are still stuck in neutral. The Investors Intelligence numbers are showing low levels of bullishness, as are positioning surveys such as the ISI survey. Hedge fund letters seem to confirm the high levels of caution.

All in all sentiment is painting a mixed picture. I would normally put more weight on the intermediate term sentiment but it is difficult to imagine hedge funds buying into the market in a big way without a resolution in Europe. I would feel more comfortable about increasing exposure if we would get a decline that would temper the optimism from short term traders.

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