Sentiment Gets Sticky

This column was originally published on RealMoney on July 13 at 9:50 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

I admit, I am fascinated by this sentiment discussion.

If the market opened down every day and then closed higher each day, folks would be ecstatic. Every day they would come to work looking for stocks to buy. And if the people all around them were bullish, it wouldn't matter one bit. They would view that as part of the bull market, and wouldn't feel the need to be contrary.

You surely wouldn't see a bunch of bulls trying to short every uptick or every move to a higher high. In fact, in that environment, if we had a few days when the market declined, they'd be telling us to buy the dip.

And they surely would not go short for a decline of a few days. In that perfect world, we wouldn't hear comments like, "With all this bullishness, we must be setting up for a massive decline."

Yet how many times recently have we come in to see the market start up and close down or open down, attempt to rally and close down anyway? I get the sense that market participants come in to work each day looking for shorts, or even a place where the Nasdaq 100 Unit Trust ( QQQQ) will bottom.

Everyone seems terribly concerned that there is so much bearishness around them. People are discussing being contrary simply because they believe we must be setting up for a massive rally with all this doom and gloom.

The same people who would not even consider going short for a three-day whack in a bull market are quick to buy the QQQQs for what might be a one- to three-day rally in this bear market.

I have no doubt that the same way we get a few whacked days in an uptrend, we also will get a few up days in a downtrend. Did any of these folks scream at us to sell or short the highs in January when the market was up something like nine days in a row? I don't recall anyone saying that. Yet didn't Apple ( AAPL) make its high in January? Didn't SanDisk ( SNDK) also make its high in January?

A lot of stock made their highs at that point. Ever since then, the number of stocks making new highs has dwindled on each and every rally. I've circled the peak number of new highs on my chart of the Nasdaq's new highs. It came on Jan. 27, to be exact.

Consider Chartcraft's Investor's Intelligence percentage of bulls. Back on Dec. 28, it peaked at 60.4%. A few weeks later, it was 57.3%. Did any of these bulls feel they had too much company? I don't recall that.

But now, everyone is watching the II readings. The 35.6% number we got back on June 21 was clearly too much company for any bears. The reading has since climbed back to Wednesday's reading of 42.2%. Doesn't look like there are too many bears anymore, does it?

There really was some good news in Wednesday's action: The number of stocks making new lows is still not expanding. The Nasdaq is awfully close to making a lower low (and breaking the neckline of that head-and-shoulders top I showed Tuesday), and such a break could produce a positive divergence.

Of course, the market does seem to be back in every-other-day mode, so today could very well be an up day -- followed by yet another down day Friday. Either way, I remain fascinated by the sentiment out there.

Everyone professes that doom and gloom abound; I think it's more like grumpiness. If it were true bearishness, wouldn't we see folks come in every day looking to short the market? Wouldn't we see all sort of big downside targets out there? Instead, the Dow is still at 11,000. How bearish can that be? That is surely not headline-grabbing.

Overbought/Oversold Oscillators

For more explanation of these indicators, check out The Chartist's primer.

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Helene Meisler writes a daily technical analysis column. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback; click here to send her an email.

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