It just might be a good time to add some long exposure. Several sentiment indicators are flashing either reduced bullishness or outright excessive bearishness. Such sentiment indicators are contrarian in their extremes. So, at the very least, the present market weakness should be a good time to do some shopping.
SentimentTrader Downside Pressure
As SentimentTrader puts it (SentimentTrader includes a useful chart):
The indicator looks at the component stocks of the S&P 500 and computes how many points gained/lost were lost, and also how much of the volume flowing into up/down issues went into down issues.
Over the past 10 days, the average of those two figures is 73%, meaning about 73% of the points gained or lost in the component stocks were lost, and about 73% of the volume flowed into issues down on the day.
There have been four other days that match or exceed this reading - 7/22/02, 10/9/08, 7/2/10 and 8/4/11. They were each within days of vicious market bounces.
AAII Sentiment Survey
Last week's sentiment survey showed 25.4% bulls, 42.1% bears, for a (bulls/(bulls+bears)) ratio of 0.38. This ratio gives a classical and rather reliable buy signal at 0.30. This week's survey should be out by the time this article is published. I'll update it in the comments.
Bloomberg Strategist Survey
Bloomberg carries out a survey to establish the consensus view of U.S. equity strategists from major banks, in what regards the allocation that should be given to stocks. This consensus hit just 52% in its latest reading, being the lowest since it dived all the way to 51% during the 2009 maelstrom.
A chart for this survey can be found here.
Conservative Investors, What to buy?
These sentiment surveys can be helpful not just for the quick-fire trader, but also for the more conservative trader. They represent a good way to get some idle cash to work in what will be, in all likelihood, a local minimum.
What differs from an aggressive approach is that the conservative investor should only use this chance to get a bit more of the same stable, high quality, dividend-paying, stocks. This might thus be a good time to buy some Intel (NASDAQ:INTC), Kraft (KFT) or Johnson & Johnson (NYSE:JNJ).
Or, if one wants to marry relative stability with dividends and a bit more aggressiveness going forward (as these stocks gain from the ongoing natural gas rally), such an investor might consider Exelon (NYSE:EXC) or Public Service Enterprise Group (NYSE:PEG).
Aggressive Investors, What to buy?
For an aggressive investor/trader, it's all about getting exposure for the bounce. This can be done using futures, using S&P 500 (NYSEARCA:SPY) or Nasdaq 100 (NASDAQ:QQQ) ETFs, or maybe even stocks that have been deeply oversold and have the natural gas rally going for them, such as the coals: Arch Coal (ACI), Alpha Natural Resources (ANR), Peabody Energy (BTU) or Cloud Peak Energy (NYSE:CLD).
Obviously, if the bounce comes - as it's likely to - then a multitude of other stocks should also work well on the upside. These are just samples that have more than just the bounce going for them.
There are signs of extreme negative sentiment that are usually followed by a significant bounce, so the time seems right to place or reinforce long positions, both for long-term investors, and for more aggressive short-term traders.
Additional disclosure: I am also long NDX futures and LEAPs on EXC and PEG.