While not an exact science, a number of metrics suggest that investors are far more bullish than sentiment readings imply.
True bearishness elicits a rush for the equity exits, which prompts position deleveraging, a valuation squeeze, a dramatic increase in cash levels and a premium on portfolio protection, as measured by the VIX and SKEW indexes.
None of these conditions exists yet. Valuations are probing historic highs, as measured by the median industry group price/sales ratio. This metric is more reliable than any forward earnings measure, as the collapse in commodity-related profits can artificially inflate P/E ratios. Ergo, thin equity risk premiums are not consistent with doubts about earnings prospects. Also, investors are not nervously hedging long positions, as evidenced by historically depressed readings in the VIX and SKEW indexes.
Meanwhile, margin debt remains near record levels, both in absolute terms and compared with market cap and/or GDP. This is worrisome because it implies a paltry overall cash flow cushion to cover margin calls in the event of a decline in collateral values, i.e. share prices.
Moreover, investor cash holdings are historically low, the opposite of a bearish signal. Other indicators also suggest a lack of fear among investors. Please see the next Insight, (Part II) U.S. Equities: Is Sentiment Truly Bearish?