Friday, April 25, 2008

Optimism returns

The S&P 500 index passed below 1400 on January 15th, and it has spent all but four days since then in the 1300's. Several sentiment indicators have been turning more optimistic during this market pause, and this makes the market vulnerable to further declines.

The only area where pessimism still reigns is in the short interest ratio, and it remains at historically pessimistic values. As long as short interest remains so high, it will limit somewhat the market's ability to fall. In other words, any decline from here will probably be excruciatingly slow, rather than sharp and sudden.