There has been a lot of concern among analysts that sentiment has been too bullish; however, the recent correction has done a lot to alleviate that condition.
The American Association of Individual Investors (AAII) performs an electronic sentiment poll every week. The cutoff is Wednesday and the results are published the next day. This quick turn around gives us an immediate view of investor sentiment before the results are stale and we can compare the results directly to the price action that generated them.
As you can see on the chart below, the recent price decline has effected a rapid attitude adjustment in investors, moving sentiment readings from very bullish to about neutral. Sentiment generally becomes more bullish as prices rise, and more bearish as prices decline, so it is a good thing that sentiment adjusted so quickly -- persistent bullishness in the face of price weakness would be unusual and a reflection of extreme complacency.
The Investors Intelligence advisor poll (not shown) has not yet reflected any response to the price correction, but this is because there is about a two-week delay from the time the advisory newsletters are written and the time the poll results are published, so it is too early to tell if newsletter writer sentiment has been affected.
It is important to remember that sentiment is a short-term indicator. For example, participants in the AAII poll are responding to this statement: "I feel that the direction of the stock market over the next 6 months will be: Up, No Change, or Down." We can see that investors' outlook for the 6-month time frame was significantly altered by a relatively small and short price decline.
