A nasty day like yesterday typically leads to a short term bounce. While the short term conditions are ripe for a bounce the intermediate term conditions remain foggy. The sentiment indicators remain mixed as market participants have backed off their bullishness but refuse to turn excessively bearish. It seems as if market participants have been punished so many times in recent years for being excessively bearish that they refuse to make the same mistake. The result is a longer, more drawn out correction.
Two sentiment indicators I look at typify current investor psychology. The leveraged bull funds at Rydex have close to the lowest amount of assets seen all year. This is a big drop from a few weeks ago and shows that many of the bulls have given up. At the same time the bear funds also have close to the lowest asset levels seen all year. While investors have backed off their bullishness they refuse to get bearish. The same can be seen with the Investors Intelligence bears, which refuse to climb as well, while the bulls have backed off.
I am continuing to give the market the benefit of the doubt in this typically strong seasonal period. I added to my net long positioning yesterday but not by as much as I planned to because the sentiment indicators have yet to line up.