The top chart shows the weekly reading (blue line) and its five week moving average (red line) of the AAII investor sentiment survey. The numbers shown on the graph are the percentage of bears divided by the sum of the percentages of bears plus bulls (so neutral opinions are ignored). You can see that both numbers now are at levels last reached at the 2010 and 2011 low points.
The chart right above this post shows the 10 day moving average of the equity put-call ratio on the CBOE. At the May 21, 2012 low point this moving average had reached the high points last seen at the 2011 lows thus showing that the volume of put trading had risen to high levels relative to the volume of call trading. This in turn is an indication of unusually high levels of bearish sentiment.
That trader sentiment is so bearish is remarkable because the drop from the March-April highs in the Dow and the S&P has been less than half as big in percentage terms as the 2011 break. The modest size of this latest break is telling us that the market thinks it has already discounted the worst that is likely to happen in Europe, and in fact did this last year. But people are responding to the news from Europe in the papers today more that the action of the market itself. This is an example of traders "fighting the last war", not the one they currently face.
I think this bearish sentiment is telling us that a big rally is imminent and will probably take the averages to new bull market highs.
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