Mood Shift Can Send Shorts Scrambling

Most single-stock investors are now traders, as they seem to believe the buy-and-hold strategy is a loser and don't want to be left holding the bag again like they were in 2000. The tax consequences of excessive trading are completely being ignored. There has been a historic explosion of hedge funds created with absolute-return, low-correlation or negative-correlation U.S. stock strategies. For instance, the UltraShort QQQQ ProShares (QID Quote) continues to see surging volume.

But the glass-half-empty view doesn't end there. The most widely read stories on most financial Web sites are written with a pessimistic slant. Wall Street analysts have made the fewest buy calls on stocks this month since Bloomberg began tracking them in 1997. Buy calls have been trending lower for six months through most of last year's rally. The ISE Sentiment Index, which I believe is a slightly better contrary indicator than the total put/call ratio, continues to average low levels, hitting depressed levels on several days recently.

Finally, high-profile companies, such as Google (GOOG Quote) and Apple, (AAPL Quote), which have the potential to get the general public somewhat interested in U.S. stocks, are constantly under attack outside Wall Street despite their stunning stock gains, business execution and hugely positive impact on the U.S. economy.

This is what I see investors doing in the current U.S. "negativity bubble." I reiterate my belief that pessimism by the general public about U.S. stocks has never been higher, with the Dow hitting all-time highs. I continue to believe the lifting of this irrational pessimism with regard to U.S. stocks will eventually result in the mother of all short-covering rallies.