I’m hypothesizing that market sentiment here is a combination of
1. Very Positive and
2. Highly Fragile.
Think about that combination for a moment. Many are bullish but there is an underlying anxiety or uncertainty to the bullishness which is subject to knee jerk quickly on a market pull back as small as 2-5%.
If this is the case and sentiment is both of these things, positive and fragile, then we can expect to see the beginnings of this abrupt sentiment shift back to negative beginning even on this mild .5% pullback here in the $SPY.
The combination is underlying bullish (as we have seen for the past couple of years) and so if we get the indicative sentiment knee jerk negative, I would view it as constructive for the market. I’m expecting it.
As an aside, there is a parallel here with a psychodynamic theory of narcissism. Kernberg described the ego of the oblivious narcissist as overly positive (grandiose) yet highly fragile which resulted in abrupt mood volatility especially when the exaggerated positive self regard was punctured by failure or injury.