Well, I woke up Sunday morning, with no way to hold my head that didn't hurt

Well, I woke up Sunday morning
With no way to hold my head, that didn't hurt

-- Johnny Cash, Sunday Morning Comin' Down

One of the front page Yahoo headlines on Saturday was "October Scares Investors More This Year".  The Friday evening news led off with Brian Williams stating "consumer prices soared by the biggest amount in a quarter-century".  And the news media have gone from covering Louisiana and Mississippi's hurricane recovery to covering the outbreak of the Avian Flu in Turkey and Romania.  The Presidents poll numbers are hitting all time lows despite the fact that 35% of the country would probably support him no matter what he did. 

It's clear that investor sentiment is starting to turn truly negative for the first time since 2003 and 2002.  The total bulls measure, which adds up the number of bulls from all the major sentiment surveys, is finally under 200 again at 197.  It hasn't been there since March and April of last year.  From anecdotal sources, I'm presuming that the measure, which lags by about a week, will continue to fall.  A reading under 180 would indicate a high probability of a significant bottom.

The 21 day moving average of CBOE total put/call ratio has stayed in "negative sentiment" range for the longest time that I can remember and the average is now over 1.0 which is truly a rare and "extreme" occurrence.  The last two times the 21 day average reached 1.0 was October 2002 and June 2004, both at or near major lows. 

And even equity only put call ratios on the CBOE and regional options exchanges (a measure I use for a confirming indicator) have rising close to new.

Traders need to remember that in using sentiment analysis one of two things have to happen for it to be a trad-able contrarian signal.  Either it needs to reach an extreme level (which it is doing) or it needs to reverse direction and become "unwound".  While I believe the market could see more volatility as it gropes for a bottom, sentiment is indicating that it is close to doing so. 

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While I believe the market could see more volatility as it gropes for a bottom, sentiment is indicating that it is close to doing so.