Friday's consumer sentiment data was credited, rightly or wrongly, with triggering the market's selloff. And that highlights an ongoing debate over just how useful sentiment data is in market timing.

Consider Wednesday's Investors Intelligence survey from Chartcraft.com, which saw bearishness fall to its lowest level since April 1987. Despite the apparently contrarian implications of that survey, major averages rallied sharply Wednesday and were able to overcome intraday weakness on Thursday.

Along the same line, but more dramatically, major averages have rallied steadily since late April, when the CBOE Market Volatility Index and its Nasdaq counterpart fell to levels many considered evident of widespread euphoria. But anyone betting against stocks based solely on the VIX, for example, has been on the wrong side of the market for some time now.

These "real world" examples suggest that, on a standalone basis, sentiment indicators don't tell us much about where the market is headed. Sentiment must be combined with other factors to have any functionality as market-timing tools, and even then some academic work suggests they're still not terribly useful to traders.

To begin, let's assume there is some value in gauging sentiment, which is widely viewed as a contrarian indicator. Too much optimism suggests everyone who's going to buy stocks has already done so, and thus the market is due for a fall. The opposite holds true for bearish sentiment. In the current environment, then, perhaps all the talk about how optimistic "everyone" is indicates that maybe sentiment isn't so upbeat after all. In other words, if everyone is so worried about sentiment, how optimistic can they be?

On a less philosophical basis, Nasdaq 100 Trust ( QQQ) puts have consistently been the most active option in the past two weeks. Such "protective buying underneath the rally points to the distrust for the sustainability of this rally," as RealMoney.com contributor Steve Smith observed.

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