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'Correction' camp on Wall Street at 17-year high

December 10, 2009 |  6:00 am

Remember that 10% stock market “correction” that much of Wall Street was anticipating a few months ago – but it never came?

Hope springs eternal: The percentage of investment newsletters expecting a 10%-or-so decline, or correction, in the short term now has reached the highest level in 17 years, according to a long-running weekly poll.

Investors Intelligence, which tracks the market views of about 130 independent investment newsletter editors, says this week’s poll found that 35.1% were predicting a classic market correction soon, while 48.4% expected the bull market to keep running and 16.5% were outright bearish.

The correction percentage is the highest since March 1992; the bearish percentage is the lowest level since June 2003.

Markets10 What the numbers show, all in all, is that most newsletter editors aren’t worried about the market suffering a serious decline anytime soon. At worst, many expect just a modest pullback leading to another leg up.

The newsletter survey, which dates back to 1963,  historically has functioned as a good contrarian indicator: Extreme readings of bullishness often herald a market slump; too many bears and it's likely the market is poised to rebound.

The caveat is that sentiment readings can stay at or near extreme levels for extended periods before the latest market trend reverses.

Unrepentant bears might take heart from other signs of investor caution under the market’s surface.

As the accompanying chart shows, the two leading stock sectors within the Standard & Poor’s 500 index over the last month have been telecom and utilities.

As a group, major telecom stocks including Verizon Communications and AT&T were up 6.8%, on average, in the 30 days through Wednesday. Utility stocks including Southern Co. and PG&E Corp. were up 4.2% on average.

The S&P 500 index was up just 0.3% in the period, weighed down by losses in energy and financial stocks.

Investors often turn to utilities when they’re looking to get defensive on the market. That’s because the hefty cash dividends that telecom, electric power companies and other utilities pay can buffer the stocks in a market sell-off.

-- Tom Petruno
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