According to the American Association of Individual Investors, bullish sentiment is nearing highs not seen since the Summer of 2009. Clearly the sentiment has shifted since the markets were on the verge of getting Hindenburged-- but what is that sentiment telling us?
It seems that nearly all arguments for the bull case are related to actions by the Federal Reserve. Aside from a few names (James Altucher comes to mind), the economy as evidence of a healthy and trending stock market is not incorporated into any arguments. We hear about the New York Fed's POMO program, and how dollar devaluation is inevitable, therefore the market goes up. While corporate earnings have been showing signs of strength, they seem bunk when we are on the giant liquidity conveyor belt.
I believe that intermediate term volatility in the market will have completely different characteristics if investors are in the market as if there was no other option, rather than a strong conviction that the economy and earnings growth would lead to a sustained uptrend.
The underperformance in crude, steels and financials can help us conclude exactly what market we are in at the moment, and if these names can finally break their bases, we may finally shift from a liquidity based environment to a fundamental based environment.
Do Note: I'm not trying to hash out a bearish thesis here, the trend is up and until that changes there is not much technical downside risk.