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Bear camp gets too crowded -- so stocks surge

September 1, 2010 | 12:22 pm

The short explanation for Wednesday’s big stock market rally: too many bears, too few bulls.

Thickening gloom over the economy last month had driven many professional and individual investors to give up hope on equities in the near term -- to the point of pushing some closely watched market-sentiment indexes to severely depressed levels.

Often when those sentiment readings go to extremes, the market does whatever it has to do to embarrass and confound the majority view.

Wednesday’s surprisingly strong report on August manufacturing activity -- a rise in the Institute for Supply Management’s index to 56.3 from 55.5 in July, the first increase since April -- was the spark needed to cause some investors and traders suddenly to rethink how negative they wanted to be on stocks and the economy.

Bearwave The Dow industrials were up 230 points, or 2.3%, to 10,244 at about 12:20 p.m. PDT, recouping a chunk of August’s 4.3% drop.

How depressed had sentiment become? The long-running survey of market newsletter editors by Investors Intelligence found that just 29.4% were bullish in this week’s tally, down from 41.7% three weeks earlier and the lowest percentage since March 2009 -- which, of course, was the month that marked the bottom for the bear market.

Likewise, a weekly survey of members of the American Assn. of Individual Investors showed the bullish percentage last week fell to 20.7%, also the lowest reading since March 2009. The AAII survey is notoriously volatile, but extreme readings often have proved to be good contrarian indicators (meaning, whatever the majority thinks, the market is likely to do the opposite in the near term).

Still, the manufacturing sector is a small part of the economy, and the August report can’t simply negate plenty of other data that are pointing to a continuing slowdown. See the latest reports on car sales and private-sector employment, for example.

And Friday brings the government’s latest report on employment trends in the economy as a whole. That report is expected to show a net loss of 100,000 jobs in August, the third consecutive decline, according to a Bloomberg News poll of economists.

-- Tom Petruno

Photo credit: Dani Pozo / AFP / Getty Images