Proceed With Caution as Sentiment Levels Dip

Tuesday, 08 Feb 2011 07:59 AM

By Rick Pendergraft

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During the last few months, I have written about the Investors Intelligence Report and the CBOE Equity Put/Call ratio. In each of those articles, I was talking about how the bullish sentiment was reaching high levels and that this was a bad sign for the overall market.

Despite these warning signs, the market has continued to move higher during the last few months.

During the last few weeks, the Investors Intelligence report has shown a decline in the bullish percentage and an increase in the bearish percentage.

The 21-day moving average for the CBOE Equity Put/Call Ratio has also changed, with the indicator moving higher since the first of the year.

Both of these changes show that investors are exercising some caution.

While ordinarily I would be encouraged by investors becoming more pessimistic, the bullish sentiment hasn’t dropped enough and these changes are coming at a time when the indices are hitting overbought levels not seen since the peak in 2007.

The Dow, Nasdaq and S&P have all three seen their 10-month RSI hit overbought levels.

While overbought can always become more overbought, the cautious play here would be to lighten up on your equity holdings.

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