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Sentiment analysis is an important component when following the markets, and is considered a “contrary” indicator.  Contrary because if too many people are bearish then there aren't enough sellers left, the balance tips to buyers, and the market starts to advance.  If too many people are bullish, most funds are already invested, the balance tips to sellers and the market weakens.  One way to determine if investors are bearish or bullish is by taking surveys and tracking at what levels these polls indicate investors are at the extremes of bearish or bullish sentiment.

The figure above shows four polls and their current sentiment levels.  Keep in mind, sentiment analysis is not a science and only provides very general information.  Sentiment is not a signal to take action, but is a warning about the current state of the markets.  There have been many occasions when bullishness reached high levels well before the market started to weaken.

The surveys show that since the lows in mid-June, advisors and investors have become more and more bullish along with the rising stock market.  The following is a summary of the survey status over the past week:

• The II survey is now in a general level of extreme bullishness which is an unfavorable sign for the market.
• The AAII survey has ticked down and in the lower area of the neutral range, favorable for the market.  
• The Market Vane survey is unchanged but at a level of extreme optimism (this poll has a different range than the prior two) which is unfavorable for the market. 
• The Birinyi blogger poll is new so there is not much history to judge bearish and bullish levels, but it is down to a level of extreme skepticism which is a favorable indicator for the equity markets.

Bottom Line: The II and Market Vane surveys clearly reflect a strong market that has rallied for over 5 months and is now at a level of risk of a correction.  A jump higher in the AAII and Birinyi surveys in the weeks ahead would indicate bullish capitulation and would be an important signal that price declines may be significant.