Bullish sentiment turned extreme the day of the jobs report last week and has stayed that way. I have read a number of critiques of sentiment and contrarian analysis in recent days because the market has yet to turn lower. Let me start by saying that there are no indicators that will give you the top and bottom of the market to the day. If that is what you are looking for you will be disappointed.
Not only will contrarian and sentiment analysis not call tops and bottoms perfectly, there are times where it will fail completely. The reason I use contrarian and sentiment analysis is to tell me approximately where we are in a rally or in a decline. When optimism is extreme I know we are likely in the latter part of the rally. This latter part of the rally can continue, but the risk/reward of being long is not very favorable. I much prefer to put my neck on the line when there is extreme pessimism.
Many people are bullish right now and are getting defensive when they are being faced with bearish facts. When Barron's has a Dow 15,000 spread the same week Nouriel Roubini turns bullish its not likely a great sign for the market. But rather than accepting these facts many bulls would prefer to take pot shots at those pointing it out.
There are a long list of warning signs that make me believe that this is not the best time to be taking a lot of risk. We can grind higher for a while but when a correction comes it will likely take away all the gains swiftly. Its possible that my analysis is wrong this time and we go to straight to Dow 15,000. But over time investing aggressively at times of extreme pessimism and being defensive when there is extreme optimism should continue to serve me well.