Some More Intermediate Term Red Flags

The Investor Intelligence (investment advisors)bearish % stands at about 15%. This is the lowest bearish % reading since early 1987. That doesn't in and of itself mean the market will fall apart, but realize that this rally since March has gotten very mature and shifted opinion back to historic extremes of optimism and speculation by some measures.

The AAII (American Assoc. Individual Investors) showed a large jump in bullish % and a large drop in bearish % this week. It puts the bearish % at about a 3 year low and more than 2 standard deviations away from the 1 year mean. So this again shows that the shift in opinion about the markets has come nearly full circle since March.

The last couple weeks the total ratio of bullish opening transactions to bearish opening transactions in the options market has reached a point higher than any since early in 2000. This shows that bullish speculation (or possibly smart $ hedging) is historically high in the options market.

Also, NYSE short interest has remained very low at around 3% since late 2008 but has dropped off a bit further to 2.8 as of the this month. Again, the low short interest % shows that there is not much fuel for short covering and certainly not excessive bearish bets on downside in the underlying issues.

These are all longer time frame (several months or more) indications, so when I look at them together, I believe that winds of change are coming at least for a sharp correction in the coming month or 2.

On the flip side long term cash data remains a bit mixed and most large scale economic opinion surveys remain low which may be a contrary indication. I will note that those types of surveys have tended to rebound in optimism much more after prior historical recessions. So how that factors into what the markets will do I'm not sure. My take is that things are not significantly better (and almost certainly worse) in an economic sense than they were a year ago.

That whole analysis is not something I have much leg to stand on though. I will say that the main measure I have been following on a fundamental basis is the debt/GDP ratio and the total credit outstanding (large scale view of money supply). This year, after decades of credit expansion, the credit volume has started to turn down. Of course I can't know when it will end, but view this as the main economic phenomenon of importance.