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"A Vast Change in Sentiment"

By Helene Meisler
RealMoney.com Contributor
1/28/2010 8:00 AM EST

Was that the "whoosh?" I think it looked pretty close. And perhaps we'll get some more downs coming our way in the next few days, especially if the market does not like the State of the Union speech. (I'm writing this after the market closed Wednesday and well before the speech).

As I explained in Wednesday's column and the day before, we are due for an oversold rally next week so any declines in the next few days only help the oversold condition.

Then there is sentiment. In Columnist Conversation Wednesday I discussed the big shift in the Investors Intelligence readings. In the past 18 years we have only had two other times with such a shift, where the move in bulls was double digits. We saw such a drop in March 2008, when we had the Bear Stearns low. Interestingly enough, the market had a great rally and then came down again to give a better low about a week or so later (now can you see why I love these whacks?).

On the chart above I've circled the date when the bulls shed so many points. You can see the one day rally and the subsequent decline. It still led to a rally.

The other time was October 2002, but in this case we had been sliding so much into that bear market low that the change in bulls was upward, not downward. So perhaps that is not as comparable.

I would, however, add that the market had a nice reversal Wednesday and the put/call ratios stayed pretty high with the total in the 95% range. That is a far cry from just a few weeks ago when we couldn't get anyone to be bearish on a down day. Remember when Google (GOOG - commentary - Trade Now) started its slide? No one was bothered as the put/call ratio stayed low. Now we get a fairly decent reversal and there is no love-fest.

So if we go back to the Investors Intelligence readings and the higher put/call ratio we can note that there has been a vast change in sentiment just as the market is reaching an oversold condition. I think we rally next week. (And yes, I still think it will be just an oversold rally that will need to come back down).

Last week in Columnist Conversation I noted that I was in agreement with Doug Kass that gold ought to rally -- my preference was for it to start later this week. I would like to see us undercut that support line and then turn around and rally.

However, I will note that ever since gold got to my target at $1,200 I have been of the mind that we are not going to see that price again for quite some time. My best guess is that gold goes into an extended trading range for the next several months. I wouldn't be surprised to see it rally next week and fail. Gold has a history of making big moves and then going sideways for months on end.

I find the oil chart a bit more interesting here. It bounced off $72.50 which was the previous low so I would look for an oversold rally in oil as well. At this point my best guess is a rally to $76-$77. "

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