You should be very afraid at how quickly individual investor sentiment has gone back into uber-bull mode (with the caveat that there aren’t that many individual investors in the market right now, so maybe it doesn’t matter).
A week ago, when the AAII data was released, we noted that the 58% reading was a level reached preceding several of this year’s selloffs and should be watched, but is still a neutral reading. Today’s latest reading of 67.71% bullish (Bulls/(Bulls+ Bears)) is the most optimistic reading of 2010 and the highest reading since the final week of 2009. Because of the importance we place on this indicator, it is a legitimate concern when we see this much optimism. At a minimum, it is a near term headwind and provides a very legitimate reason to take some profits or initiate hedges until optimism fades back to neutral territory, or the market makes a corrective move lower or the economic data picks up legitimate upside momentum. We expect clues will unfold over the next week and provide clarity. This suggests that over the very near term (approximately 1 week), upside should be capped or a push through resistance could be sold for a trade.
To provide additional context, when the 68.18% reading was registered in the final week of last year, we placed less emphasis on the reading because the tape had been so “Strong” since the March 2009 low. During the “Ugly” bear move from the 2007 peak to the 2009 trough, there were no 70%+ readings and purchases below 40% hurt. Over the past 5 months, the market has consolidated in a trading range which fairly places the tape in the “Normal” category.
These readings often and usually trend, so you wind up with successive readings building momentum in one direction. Therefore it is very possible if the market were to breakout here another more optimistic reading could be registered next week. As we noted earlier, once that breakout occurs it would likely be at least a good selling opportunity for a trade.