J.C. Parets (@allstarcharts) over at AllStarCharts.com has a fascinating post up about sentiment today. According to the American Association of Individual Investors (AAII), we have not seen sentiment about equities this bearish since August 2010, which we know marked the end of a multi-quarter correction before the market rallied hard.
It is extremely difficult to trade based on sentiment alone, and there is most certainly no substitute for price action and volume as your two key indicators. However, when fear and pessimism return to the marketplace on this level, it is worth taking notice and factoring it into your analysis as a contrarian indicator, much more than usual.
I wrote about this too, 7-8% down and everyone is bearish? I dunno.