When was the last time your favorite sports team squandered a good lead and ended up losing? Did overconfidence play a role?

As German soccer legend Sepp Herberger put it, “the ball is round and a game lasts 90 minutes.” Investing doesn’t stop in the 90th minute, fourth quarter, 9th inning, or 18th hole. Investing is a life-long endeavor and missing a “game changing” event can have drastic consequences.

Investment-game changing events usually happen when least expected. According to some polls, investors are as unconcerned about a market drop as they were in the spring of 2000 and fall of 2007. Before we talk about the significance of what investors think, let’s take a look at what influences investors’ opinions.

1) Earnings and their “ugly cousin”

Earnings are up. Even though this is welcome news, year-over-year growth is compared to Q1 2009 when earnings were slim. Reported earnings for Q4 2008 for the S&P 500 (NYSEArca: SPY) constituents was a negative $23.25. Of course things could only get better.

But there are bigger problems. The following headline from the Associated Press highlights one of them: “Amazon profit up 68%; outlook scares investors.” The scary part, according to AP, is that revenue for the current quarter may fall short of analysts’ expectations.

Alcoa, General Electric, Sony Ericsson and many other companies beat their profit forecast on lower than expected revenue. If companies increase profit on lower revenue, the most likely explanation is cost cutting. The economy of scale obviously is a moot point when companies scale down.

The recovery in the technology (NYSEArca: XLK), materials (NYSEArca: XLB) and consumer discretionary sector (NYSEArca: XLY) might not be as strong as suspected.

Another bug heading for a windshield is profits derived from the financial (NYSEArca: XLF) and banking sector (NYSEArca: KBE). Profits from this sector make up nearly one third of all corporate profits.

Financial institutions continue to rack up losses from their mortgage portfolios. Those losses are artificially masked by two factors: 1) Revenue from trading 2) Overvalued real estate loans on their balance sheets. With the change of FASB rule 157, banks are now (and have been since April 2, 2009) allowed to significantly inflate assets. How much of their profits are real? Nobody knows for sure, but we can be confident that time will tell the tale.

2) Bankruptcies

Personal bankruptcies are just one of the tell tale signs of a weak economy (foreclosures are another). In March, over 158,000 Americans filed for personal bankruptcy, a 35% month-over month and 19% year-over-year surge.

3) Insider selling

The latest data (by Investors Intelligence) shows almost eight insider sells for each buy. The eight-week average ratio is 4:1. Sell/buy ratios above 2.5:1 are considered bearish. Investors Intelligence notes, that “insiders continue to act as if a major top is near.”

4) Buying climaxes

Last week, Investors Intelligence reported 467 buying climaxes, one of the ten highest readings in their 20+ year history. Buying climaxes occur when a stock makes a 12-month high, but closes the week with a loss. They are a sign of distribution and indicate that stocks are moving from strong hands to weak ones.

5) Investor sentiment

It is no secret that bull markets climb the proverbial “wall of worry.” But how do you define a wall of worry? It’s easy to define and we’ll do so in just a moment.

Looking back to March 2009, we can say for certain that the rally was ignited by fear. At a time when Wall Street was bracing for the Great Depression 2.0, the ETF Profit Strategy Newsletter gave a strong buy signal via its March 2, 2009 Trend Change Alert.

Recommended ETFs included the Ultra Financial ProShares (NYSEArca: UYG), Ultra S&P 500 ProShares (NYSEArca: SSO), Nasdaq QQQQ (Nasdaq: QQQQ) and many others. The market top was to be recognized by a resurgence of optimism.

We’ve seen elevated levels of optimism since September 2009. This is exactly the optimism that invalidates the “new bull market” notion. From September to now, the optimism has reached extremes not seen since 2000 or 2007.

It is fear that triggered the rally but it is a wave of optimism and enthusiasm that lifted the Dow Jones (DJI: ^DJI), S&P 500 (SNP: ^GSPC) and Nasdaq (Nasdaq: ^IXIC) by some 75%. As the chart below shows, there is no wall of worry. In fact, based on the prevailing extremes, the market is closer to a major decline than a long bull market.

The VIX just fell to its lowest level since July 2007. Investor’s cash allocation (as per AAII) to the lowest level since spring 2000 and investors’ bullishness nearly eclipsed the extreme January 2010 level (see chart above).

Particularly concerning is the options put/call ratio. The CBOE Equity Put/Call ratio fell as low as 0.32, its lowest level in nearly a decade (see chart above). This means that option traders bought three call options for every put option.

The setup for a waterfall decline

How do option traders influence investors you might wonder? The tricky thing with such a low put ratio is that long positions are largely unprotected or naked. This means that the only way to protect against falling prices is to sell.  An abundance of put options on the other hand would allow traders to hold on to their positions as option gains would neutralize losses from falling prices.

With such a low put/call ratio, when the market falls, it usually falls hard and fast.

A glimmer of hope

For right now, investors can cling to momentum as their investing ally. Momentum has been pushing stocks and the range for a market top has not yet been reached.

The ETF Profit Strategy Newsletter uses a combination of Fibonacci retracements, pivot points and other sentiment readings to determine targets of a short to mid-term nature and valuation metrics to determine long-term target ranges, such as the target level for the ultimate market bottom.

As of today, the bulls have been outscoring the bears. But the game is not over. According to the ETF Profit Strategy Newsletter, we are only in the third or fourth inning of a multi-year bear market that began in 2007. This is explained in detail in the November issue of the newsletter.