The one and only data point that has given the bears pause is the extremely bearish sentiment readings. As an example the AAII survey recorded its highest bullish view on December 21, 2010 at 63.3% bullish to 16.4% bearish whereas on June 15, 2011 those readings were 29.0% bullish to 42.8% bearish.

Bulls have argued this contrarian indicator says to buy stocks while bears have scratched their heads questioning why sentiment is sousearish with the VIX below 20 and equities only 7% off their multi year highs. Makes no real sense or does it?

Perhaps the best sentiment reading is the level of margin investors are using to place their bets. After all, margin means you are literally sitting at the poker table determined to beat the house while the sentiment survey has you sitting behind a keyboard answering questions. Who is more emotional and thus the one you want to fade? If you cannot answer this question it is because you are sitting at the poker table as well apparently.

Below is a chart of debit margin balances versus the five week moving average of the AAII bullish sentiment readings. Notice how bullish views peaked five months before margin levels peaked in 2007. Similarly bullish views peaked in December 2010 (the moving average peaked in February 2011) while margin levels continue to rise through April. Considering the May 1,370 high subsequent margin data when available may very well show May as the peak in margin debt.

There is at least one possible explanation for this divergence. As sellers move out of the market, this historically contrarian

By Tony Pallotta

http://macrostory.com/

Bio: A Boston native, I now live in Denver, Colorado with my wife and two little girls. I trade for a living and primarily focus on options. I love selling theta and vega and taking the other side of a trade. I have a solid technical analysis background but much prefer the macro trade. Being able to combine both skills and an understanding of my "emotional capital" has helped me in my career.

© 2011 Copyright Tony Pallotta - Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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