After the S&P recorded its third straight weekly gain, I expected to see investor sentiment make a big jump toward the bullish side.

Instead, what has happened is that the sentiment indicators are slowly shifting away from the extreme bearish readings we had been seeing.

The Investors Intelligence report shows that the bearish percentage dropped from 46.3 percent to 41 percent last week. The bullish percentage increased from 34.4 percent to 35.8 percent.

The fact that the bearish percentage is still greater than the bullish percentage is encouraging.

The Rydex Nova/Ursa Ratio has climbed from the 0.15-0.18 readings we saw from early September through early October and is now back up in the 0.28-0.32 range. While up from the lows, these readings are still well below the norm over the past year.

The 21-Day Moving Average on the CBOE Equity Put/Call Ratio has dropped from the 0.81 reading we saw in late August down to the 0.70 area which is the middle range of readings for the past year.

The fact that we have seen the sentiment indicators move off their extreme bearish readings to more modest readings is a good sign that the rally could continue. When we see a stampede of investors rushing back in, rallies tend to fizzle out.