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Buy signal? Market newsletters most bearish on stocks since March 2009

September 14, 2011 |  8:10 pm

Investors looking for an excuse to buy stocks after the summer plunge might be encouraged by a closely watched poll of independent market newsletter editors: More of them are pessimistic about equities than at anytime since the bottom of the last bear market in 2009.

The Investors Intelligence newsletter survey, which dates back to 1963 and tracks the views of more than 100 letters, historically has been 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.

This week’s survey showed that the percentage of editors who are bearish on stocks rose to 40.9%, up from 37.6% the previous week and the most since March 2009 -- exactly when the market was beginning to rebound after the horrendous plunge that began in fall 2008.

The percentage of editors who said they’re bullish on stocks fell to 35.5% this week, down from 38.7% the previous week. The bullish camp has crashed from a 2011 peak reading of 57.3% on April 5, and now is the lowest since it was 33.3% on Sept. 7, 2010. That was just as stocks were beginning to surge after struggling through the summer of 2010 on renewed recession fears.

Editors who aren’t outright bullish or bearish are in the “correction” camp, meaning they expect a short-term drop in stocks but not a full-blown bear market decline.

The Investors Intelligence survey’s record as a contrarian indicator reflects that most people can’t help but join the crowd, whichever way it’s going. After a frightening market sell-off, like the one that slammed share prices beginning in late July, many investors assume there must be worse to come.

On the flip side, when stocks are flying high (as they were last spring) human nature is to want to believe it will never end.

When sentiment reaches extremes, either bearish or bullish, the market typically does its best to confound the majority view.

Of course, there’s plenty to be afraid of at the moment -- in particular, Europe’s deepening debt crisis and the U.S. economic slowdown.

A year ago, stocks began to rally in part based on expectations for a new dose of monetary stimulus from the Federal Reserve, which the central bank formally announced last November.

This time, market bulls again expect the Fed to ride to the rescue with some kind of stimulus program, most likely aimed at pulling longer-term interest rates even lower. Policymakers will meet Tuesday and Wednesday.

The caveat about using the Investors Intelligence survey as a contrarian “buy” signal is that peaks in bearishness only are clear after the fact. There are a lot of bears now, but there were even more in March 2009, when the bear camp reached 47.2% in the survey -- 6.3 percentage points above the latest reading.


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-- Tom Petruno

Photo: A grizzly bear statue at a shopping center in Mammoth Mountain. Credit: Los Angeles Times