Sentiment Remains Skewed to the Bullish Side

Tuesday, 13 Aug 2013 07:39 AM

By Rick Pendergraft

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The major indexes have experienced a nice rally over the last few months, erasing the pullback that occurred in May and June.

The problem is that the rally has put the indexes in overbought territory based on their 10-month Relative Strength Index (RSI) readings and their monthly slow stochastic readings. In fact, the 10-month RSI on the Dow Jones Industrial Average, Nasdaq, Russell 2000 and Standard & Poor's 500 have all reached their highest levels since 2007 in the past few months.

Overbought levels on a couple of indicators ordinarily wouldn't concern me all that much, as we know that overbought markets can become more overbought.

What concerns me is that we are reaching these extreme overbought levels right as we are seeing such extreme levels of optimism from a number of sentiment indicators.

The Investors Intelligence report from last week showed a bullish percentage of 51.6 percent and a bearish percentage of 18.5 percent. These readings put the ratio of bulls to bears at 2.789, which is the second highest reading of the past year.

Even though the ratio is high and caught my attention, the bearish percentage is what we should focus on. The 18.5 percent reading is the lowest bearish percentage in the last two years.

We have also seen the CBOE Volatility Index (VIX) drop below the 12 level on a couple of occasions this year, and that hadn't happened since 2007.

When you combine the overbought levels, the low bearish percentage and the low VIX readings, you can see why I am concerned about the market right now.

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