Do folks you know feel anxiety or aversion about equities, or disbelieving that new lows are possible? Answer clues next step in this sentiment cycle

How are you and the folks you know feeling about equities market investing? Are you feeling anxiety that's turning to aversion, so you are starting to think about giving up on being invested in equities markets altogether? In an article by David I. Templeton, Charting Where We Are in the Market Cycle? (SeekingAlpha, 7/5/09), it seems he thinks that's how you're feeling. He looks at this using the chart at right from a book he quotes, "The Nature of Risk" (1991) by technical analyst Justin Mamis. Well, with the recent pop in the VIX perhaps some anxiety - but actually the remarkable decline in the VIX until just a few trading days ago didn't really look like a wall of worry to me. But, I can understand his point of view, given that he compares the areas he circled on this sentiment chart, to the daily chart of the equities markets. Then again, I was speaking with some family members over the weekend, and one - a true ordinary investor with no trading experience whatsoever - when I described that the equities markets had again gotten to a point of riskiness warranting selling and moving to the sidelines - asked: "Okay, and when do you recommend that I should buy?"

Another family discussion revolved around whether to tell certain in-laws about the risk level. The answer I was given was, "Oh, they'll never sell." This all comes to mind now because as soon as I had seen this article at SeekingAlpha, I had meant to post something about it. So, once again, I can understand that Mr. Templeton (great name for a market analyst of course, evoking Sir John T.!) thinks we may be near a great buy signal once completing a head-and-shoulders pullback that makes the daily chart look like the "aversion" area he encircled on Mamis' chart.

But what about how this sentiment cycle compares with the monthly chart of equities? Interestingly, when you read Mr. Templeton's article, you see he included the monthly chart with a comment that there's indeed plenty of room to get back up toward those highs of 2007.

My rejoinder is, when you look at the monthly chart (my SPX monthly chart is below), then take another look at Mamis' chart, why not pay attention to the area I encircled in blue (second iteration of Mamis' chart, at right) - aren't we just as likely to be suspended still in the "Overt warning" portion of the "Disbelief" cycle?

And I really do not believe that we have yet seen the "Panic" and "Discouragement" phases. I'd almost expect the "Discouragement" phase to be accompanied by events like permanent bans against Jim Cramer ever being on TV again, discontinuing TV shows like "Fast Money", and even shows and movies reviling people who have anything to do with financial markets. Other events could include people being more openly advised not to invest in 401(k)'s or perhaps shifting all their IRA and 401(k) funds out of all mutual funds and only into cash ... you get the idea.

Now I'm not suggesting that I firmly believe the next direction in equities is inexorably down to 600 or 400 SPX. It's possible, but I still agree there can be the alternate count of an interim pullback followed by another rally leg up (even though I'm not looking for that as my own primary view). I'm just trying to say that I'm not getting the feeling that we've made it out of the "Disbelief" phase yet!