The Hulbert Nasdaq Newsletter Sentiment Index (HNNSI), which is the Hulbert Financial Digest’s most sensitive measure of investor sentiment, suggests we are in a period of extreme bearishness. David Aaronson, a former Baruch College finance professor who runs TSSBSoftware.com, produces a “purified” version of the sentiment index and agrees with the conclusion HNNSI suggests. Aaronson explains that the current sentiment is even more extremely bearish than in August, when they had hit their lowest level in five years, because recent market activity doesn’t justify the sentiment as it did then. Sentiment is now as bearish as it has been since early 2000.

What does this mean for investors? A contrarian analysis suggests it is a bullish omen. However, as Aaronson notes, “sentiment often will hit its low before the market does.” Over the long run, extreme bearishness might indicate a coming bullish period. In the short term, however, the low point of the current correction may still be ahead. See the chart below, courtesy of David Aaronson via MarketWatch.com.