June 2011 and July 2015

Whenever one sees a market that attracts a lot of bears, it is natural for contrarians to get confident that the bears will be wrong and start buying stocks.  Yes, that usually works in the short term, from a 2 day to 2 week time frame.  But if you look beyond that, having a lot of bearish sentiment isn't necessarily a sign that stocks will rise.

Two cases that clearly show this are June 2011 and July 2015.

In the middle of June 2011, you had a lot of investor nervousness about Greece, the debt ceiling, and overall European sovereign credit.  The market was more bearish than now, even though the market had only gone down about 5-6% from recent highs.  After the bearishness dissipated, you had a sharp rally back near the previous highs, which consolidated for a few weeks and the next pullback led to a waterfall decline of 20%.

In early July 2015, you also had a lot of investor nervousness about Grexit, which is amazing considering how insignificant Greece has shown to be over the years.  Anyway, you had a 4-5% pullback and a lot of bearishness.  Perhaps about the same as now, and just like in June 2011, you had a sharp rally back near the previous highs, a consolidation for a few weeks, and the next real pullback led to a waterfall decline of 15%.

In both 2011 and 2015, you had a few month consolidation near the highs after a huge rally.  While we haven't had a huge rally since 2015, you could argue that it has been a huge consolidation before the next big waterfall decline.

With the high US equity valuations and the lack of earnings growth, uncertainty over the US election, and China, there are several good reasons to be bearish.  This is one of those times where being a wise guy contrarian (I'm bullish because everyone is bearish) could lead to serious losses over the next few months.

I am short term bullish, looking for a final short squeeze rally up towards 2100, probably after the Fed doesn't raise rates in June, but medium term, looking out over 1 to 3 months, I am very bearish, as this market looks like it is forming a massive top with no positive catalysts other than QE4, which will only happen if the stock market drops big beforehand.