What Do Sentiment Indicators Say About This Rally?

I have been expecting a bounce in the market. Today the market is up almost 3%. The question is: how much further does this bounce have to go?

Lately, people have been concerned about the resurgence of pessimism and bearishness. But how pessimistic are people really?

On the one hand, you have investor surveys like AAII showing that people are quite bearish. The AAII is a rather goofy survey. I have been unable to determine its sample size. Also, the investors surveyed are flighty and very quick to change their minds. The %bearish went from 57% to 38% in one week this July.

My preferred sentiment indicator is the ratio of equity put buying to call buying as reported by the CBOE. Unlike survey indicators, this one requires investors to put their money where their mouth is. So far today, the ratio has been 0.46, which is about 2 standard deviations below the mean.

Another indicator: think about all the recent M&A activity. Look at Intel's silly acquisition of McAfee for $8 billion, which is 45 times earnings. Or the bidding war between Dell and HP over 3Par, which is not profitable, at a valuation of 300 times EBITDA.