There is much banter/blogging about suggesting that bullish sentiment is very high with respect to the equity market. These sentiment readings come from various surveys such as the AAII, Market Vane etc. Now we find ourselves in a situation where a number of commentators are suggesting that the equity market is about to collapse or at least have a significant correction because there is too much bullish sentiment. I don't agree because I am highly skeptical of how useful these indicators are at least from a medium to long term perspective.

Just a few months ago (at the lows of August) sentiment was as bad as it was in March 2009. Well I can believe that given the euphoria over the so called "double-dip", "deflation", the "Hindenburg Omen", and "Dow 1000". I did a post back then entitled "Double Dip is a figment of the crowd's imagination". I think I had about 80 responses to that post most of which could only be described as "hate-mail". Anyway I digress. My argument is this: How can sentiment go from being from what one can only describe as "toxic" to "materially" bullish in a mere 2.5 months? My suspicion is that if there is a pull back in the S&P 500 of say 50 points anyone who was remotely bullish would transform into raging bears again, that is punters who now purport to be equity market bulls are in reality bears masquerading as bulls.

One of the indicators that I find rather useful from a long term perspective at least is the Conference Board Consumer Confidence Index. Note the level of this index, it currently suggests that consumer "confidence" is more or less as bad as it has ever been since records began in 1967.

You may ask what is the link between this index and where the S&P 500 is currently trading? Well equity prices are merely a reflection of confidence, nothing more and nothing less.

I hear a little voice behind my ear whispering... bull markets are born in pessimism, growth in skepticism, mature in optimism, and die on euphoria! That is the immortal whisper of John B. Templeton. Did you ever read the book The Templeton Way? Well I trust you read the preface written by himself where at the end he uttered these immortal words "invest at the point of maximum pessimism". I will leave you to figure the rest out.