Extreme Sentiment Slowly Shifts, May Signal Long Rally

Tuesday, 08 Nov 2011 08:00 AM

By Rick Pendergraft

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Since the October rally started, we have seen the sentiment indicators shifting away from the extreme levels of pessimism we saw at the end of September and the beginning of October.

While the indicators are shifting, they are moving slowly and that is good news for the bulls.

Looking at the Investors Intelligence report and the ratio of bullish percentages to bearish percentages, the ratio dropped to a low of 0.72 on October 12 and is now back up to 1.17. This is far from the 3.65 reading we saw back in April. In fact, it isn’t even back up to the half-way point between the high and the low which stands at 2.185.

Looking at the Rydex Nova/Ursa ratio, we see a similar picture. After hitting a high of 0.71 in April, the ratio dropped to a low of 0.15 in early October. The current reading is 0.359 which is below the midpoint between the high and low of the past year which is 0.43.

Seeing these indicators creep back toward optimism is a good sign.

When we see huge shifts off the bearish extremes, rallies tend to fizzle out.

When we see a slow shift it usually indicates that a more prolonged rally is at hand.

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