That’s the question posed by CNBC’s Mark Haines this morning. He mentioned that the broad averages were down around 7% while the S&P is nearly back to where it started 2007.

I normally don’t opine on market direction but the past few days flashed a constellation of signs that recent price action may be playing dangerous tricks on the minds of many market participants. And so it is time to examine where we might be in the sentiment cycle.

Justin Mamis: Example of a Simple Sentiment Cycle

The following is a list of “signs” that stand out in my mind:

1. Lots of discussion on TV, asking if this is the time to bargain hunt in financial stocks;
2. Continued rotation out of financial stocks into tech stocks, as if certain sectors are expected to hold up;
3. “Glowing” economic news, of which the best examples were the CNBC interview with John Chambers and the Ben Stein article in NYT; and,
4. Previously bearish pundits “feeling better”, expecting a bounce. See interview with Peter Costa [VIDEO].

For me, the call to action was when I saw a popular blogger write a succession of posts:

• August 12: “The central bank money pump now has the equity market ready for recovery.”
• August 13: “Markets are on the rise now, as I anticipated, for the simple reason that central banks have stepped in to save the bacon of [the banks and brokerage firms]. For now.”
• August 14: “Global markets, despite the cross-currents, continue to recover from a pullback, as I anticipated. . . .Today could be much the same, perhaps clearing the sell orders first and then improving during the session.”
• August 15: “I agree that there are valid reasons for a market pull-back here (for a day or two), but I continue to believe that the important Dow 12800 level will hold up and that a brief rally for two to five months will occur, following which the new primary Bear will set in. In the meantime, I have a list of stocks for you to consider. . . .The wave of selling in this short-term pull-back in an ongoing primary Bull market, is likely to end in a day or two, as I see it.”

The Sentiment Cycle

Let me put on my market technician/pundit hat this morning. I will make this short and to the point.

1. On bargain hunting: It’s probably not a good idea to bargain hunt in sectors that have outperformed the market for a long time. Especially when price action is down and the bad news is probably yet to come. If you have CNBC Plus, click the On Demand tab, search “Mark Tinker” (in quotes) and review his June 6, 2006 interview;
2. On rotation: People rotate if they think the broad market is going hold up. And from their actions, we can infer that a good chunk of participants are not acting bearish, no matter what they say;
3. On glowing good news: It is the nature of market tops to come out of “nowhere”, when things look so good, before anyone is ready; and,
4. On pundits: When markets go up, they are bearish. They stay bearish until the market experiences a big break to the downside, at which point, they pronounce that “it is over” and provide insane downside targets. This is exactly what happened during the May/June 2006 dislocation, and the market proved them wrong.

Conclusion

I can’t stress the importance of reading market sentiment. Last year, when everyone was so quick to throw in the towel, it was easy to pinpoint “The Big Dip” that could be bought.

This time, people are bargain hunting, playing the rotation game. Even bears feel compelled to qualifying their outlook (longer-term bear, short-term bull that might even go to new highs, will happen in October, blah blah), just in case the market rams them up the wahzoo again.

To me, all this sounds a lot like the market is in the “Subtle Warning/Disbelief” phase. There’s just a certain something in the air that feels like the “Uncle” point is near…

And to paraphrase the eternal words of Justin Mamis, when someone asks if this is a bottom, the answer is: “Not if you’re still asking.”