A Cure for Complacency

This column was originally published on RealMoney on Jan. 18 at 8:42 a.m. ET. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

Let's talk about sentiment.

More specifically, let's discuss the Investors Intelligence readings that came out Wednesday.

The percentage of bulls sank to 50.5%, well off the high of 59.8% in early December. Yes, this confirms that the bullish ranks are thinning. But please, do not confuse this with too much bearishness. There's not too much bearishness -- just less bullishness.

The percentage of bears in the survey has remained steadily in the 20% range for months now, so anyone who wants to fuss over a rise of 2 percentage points is grasping at straws, in my opinion.

However, the massive rise in the percentage of folks looking for a correction was noteworthy. We last discussed this number in early December. I went through great pains to show that when this reading gets below 17% as it did then, the market rarely keeps on soaring. The best outcome is often a sideways market.

For six weeks afterward, the Nasdaq went nowhere. The S&P 500 was around 1420 then, and today it stands a "whopping" 10 points higher at 1430. The fact that it took six weeks to move 10 points is not what I'd call a ringing endorsement of a rally. I'd point out that few were looking for a correction in December, yet that's exactly what we got: a market going nowhere or a correction.

But now the number of correction-minded folks has risen to 27.4%, according to the survey. It's funny how a market that went sideways for six weeks got people to jump into the correction camp. Why don't they look for a correction when the market is soaring? Wasn't the time to look for a correction in mid-December, not early January? I suppose that is why sentiment matters: Human nature rarely changes.

I'm sure I could conjure up some statistical way of saying that when the percentage of correction-minded folks gets this high, the market does something specific. But I really can't. Instead, what you should keep in mind as you look at these readings is that correction-minded folks are not bears. They are bulls who are looking for a correction.

So if we add up the bulls and the correction-minded people, you can see from the chart that bullishness is alive and well in the market.

It peaked in late December at 80.4% and is now at 77.9%. That's like one person moving from bull to bear. If you want to make a fuss over that, then by all means, please do. Me? I will say bullishness is thinning, but it is not gone.

Let's move on to the American Association of Individual Investors readings, just out this morning. The bulls are at 57.58%, a reading not seen since last January, which was for all intents and purposes the Nasdaq high for the first half of the year. (If you don't believe me, look at when stocks like Apple (AAPL Quote) and SanDisk (SNDK Quote) peaked.)

This tells me that the little guy is back in as a believer. So he sat out the entire rally and now likes it?

Another thing that concerns me is that the put/call ratio was higher Tuesday than it was Wednesday. Tuesday's market was barely down, so why was the ratio higher than it was Wednesday, when the market, especially the Nasdaq, was clearly weak?

That says to me that people were more worried about Intel's (INTC Quote) earnings than they were about Apple's earnings. Bulls should like worrywarts, and Wednesday they went into hiding.

The 10-day moving average of the put/call ratio, which I showed here on Tuesday morning, is back at the bottom of the range, usually the point where we tend to go back down again.

Thus, where Tuesday folks were scared, Wednesday they showed too much complacency. A few down days -- just what I've been looking for! -- might cure that complacency. In the past few months, that's about all it has taken. But I'll be monitoring it closely.

Overbought/Oversold Oscillators

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