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Bearish sentiment on stocks at lowest since 2007

August 26, 2009 | 12:41 pm

Warnings that the stock market’s summer rally is overextended have meant absolutely nothing in recent weeks, as major indexes have continued to work their way higher.

So for what it’s worth, or not, here’s another classic sign of a toppy market: The percentage of investment newsletter writers who are bearish fell this week to the lowest level since October 2007 -- the same month the last bull market peaked.

Investors Intelligence, which tracks the market views of about 130 independent investment newsletter editors, said 19.8% of the letters now are bearish on stocks, down from 23.1% the previous week and the fewest since the 19.6% reading of October 2007.

Bullup Newsletter editors that count themselves as bulls reached 51.6% this week, up from 48.3% the previous week and the highest since December 2007.

Editors who aren’t bullish or bearish are in the "correction" camp, meaning they expect a short-term market pullback. Their ranks now total 28.6% of those surveyed, the same as the previous week.

The newsletter survey, which dates back to 1963, often has functioned as a good contrarian indicator: When sentiment reaches extremes it’s usually a good idea to bet against the crowd, and with the minority.

But John Gray, an analyst at Investors Intelligence in New Rochelle, N.Y., says many other barometers of the market’s health have held up relatively well this month, suggesting that stocks aren’t about to fall off a cliff. More likely, he says, is that the market overall will continue to churn around current levels for the near term.

No doubt about it -- the bears had it wrong about August. The Standard & Poor’s 500 index, trading little changed today, is up almost 4% this month, lifting its year-to-date gain to 13.6%.

One other note about bullish sentiment: History shows it can go a lot higher than this before the market rolls over.

This week’s Investors Intelligence survey reading of 51.6% bulls, though the highest since late 2007, still is significantly below peak levels when market optimism is really flying high. Bulls topped out at 62% in October 2007, for example.

In 2005, bullish sentiment was above 50% for most of the year.

-- Tom Petruno

Photo: A sculpture of an upended bull in Beijing. The animal is one of the 12 signs of the Chinese zodiac. Credit: Adrian Bradshaw / European Pressphoto Agency