With stocks and oil rallying, today King World News is pleased to feature a key chart that helps to explain why the volatility in the stock market has increased so dramatically. This piece also covers Russia's troubles as well as what is happening in the crude oil markets.

Here is the Investors Intelligence report along with the all-important sentiment chart: The DJ and S&P 500 fell more than 3% last week while the NASDAQ and Russell 2000 lost 2%. Losses continued Monday as crude oil fell to $55/bbl. The US recovery remains strong but Russia moved to the forefront of troubled economies around the world. Many of our market indicators retreated with the averages and advisors continued to shift away from bullish stances. So far their worries are short term with mentions of the traditional seasonal strength between Christmas and New Years Day. 

The bulls ended at 49.5%, from 51.5% a week ago. That shows a low since recovering from the mid-Oct market correction reading at 35.3%. They just exceeded 56% around Thanksgiving, not quite up to the prior peaks this year. Bulls above 50% show increasing risk while +60% levels point to near fully invested outlooks that usually precede a stock market top. Their Oct low showed they had raised cash which was quickly put to work. Their latest decline into neutral ground has further to go before suggesting new buying. 

After just a fractional change the bears were 14.9%, compared with 14.8% last issue. The bears generally ignore the US economic strength, except to note the length of time without a serious market pullback. They do expect negative overseas factors to finally trigger a large US decline.

There was another small increase for those projecting a correction to 35.6% from 33.7% last time. That is still well below the mid-Oct reading of 46.5% but up nearly 7% from mid-Nov. The large drop coincided with a flood of funds into equities that powered the index move back to highs. That has ended and they are raising cash anew. The correction level is now neutral but more gains will allow for new buying. Advisors now make quick opinion shifts, reacting to market swings and world news. 

The spread between the bulls and bears narrowed to 34.6%, from 36.7% a week ago. It remains a concern but is also the third week below danger territory above 40%. The mid-Oct difference of 17.1% achieved a near positive level. Differences over 30% are a worry and above 40% signal major caution. The mid-Oct spread was a low since Sep-2013 when it was expanding from the favorable reading of 13.4% that Aug. Bears haven't outnumbered bulls (a negative spread) since October 2011.

Sentiment Chart

KWN II 12:17:2014

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Eric King