Market Sentiment: Are we Getting Too Bullish?

Overview:
The most dangerous thing in the stock market is a strong bullish consensus, a point that we maybe rapidly reaching. Let's take an objective look at the current market sentiment.

Long Term Sentiment:
A good gauge of long term sentiment includes the level of cash at mutual funds and the dividend yield on the S&P 500. Currently, cash at mutual funds stands at 3.6%, reaching a record low a few months ago at 3.4%. This is a level that has been reached only twice, in 2000 and in 2007, which turned out to be important highs in stocks. Currently the dividend yield of the S&P 500 stands at only 1.83%, near it's all time record low. Long term investor's are so certain of future capital gains, they literally do not want to be paid cash in hand.

Chart 1: S&P Dividend Yield
Courtesy of  http://www.multpl.com/

Intermediate Term Sentiment:
There are several sentiment surveys that generally provide a good view in the intermediate term sentiment, and become very predictive once they reach extremes. The American Association of Individual Investors currently stands at an elevated 49.66% bulls, even reaching 57.56% three weeks ago. Investor's Intelligence Adviser's survey shows a similar sentiment picture, last week recording 55.4% bulls. These are extremes not seen since 2007.

Short Term Sentiment:
The Put/Call ratio has reached a point where one would expect, in the short term a correction.

This has been a reliable short term setup; the 5 day moving average of the total put call ratio has reached one standard deviation below the mean (the setup) and has since crossed back above the one standard deviation mark (the trigger).

Summary:
In short, we have long term investors, intermediate term investors, and short term speculators all taking the same side of the trade at the same time. When everyone agrees, the opposite thing will always happen. Seeing as how these indicators are aligned the same way in which they were in 2007, caution is definitely warranted.