Stocks Pessimism Posts Longest Streak Since 2011 Market Bottom

Bearish sentiment in a survey of individual investors has surpassed the historical average for the longest stretch since October, when stocks began a rally that lifted the Standard & Poor’s 500 Index 24 percent.

A poll by the American Association of Individual Investors showed 44.4 percent of respondents say American stocks will fall over the next six months. That’s the eighth consecutive week that pessimism stayed above the 25-year average of 30 percent.

Concern Europe’s debt crisis will deepen and the recovery weaken have erased as much as $1.8 trillion from U.S. equities since March. The last time the proportion of bears topped the average for this long was in the 14 weeks through Oct. 20, 2011, just after the S&P 500 bottomed at 1,099.23. The benchmark measure for U.S. stocks went on to surge as much as 29 percent, reaching a four-year high of 1,419.04 on April 2.

“Individual investors tend to get in when the markets are red hot and they tend to get out when the markets are at the bottom,” Robert Carey, who helps oversee $53 billion as chief investment officer of Wheaton, Illinois-based First Trust Portfolios, said in a telephone interview. “It’s been one series of issues after another, but, ultimately, fundamentals will weigh out and overwhelm any sentiment that people have.”

The S&P 500’s price-earnings ratio slid to a two-year low of 11.9 times annual profit on Oct. 3 before the level of bearishness by individual investors climbed above its historical average. The multiple has since rebounded 16 percent and is trading at 13.8 times profits in the past year.

Record High

The reading reached an all-time high of 70.3 percent on March 5, 2009, four days before the S&P 500 bottomed at a 12-year low of 676.53. The benchmark stocks index has since surged 102 percent as corporate profits exceeded analysts’ estimates and the Federal Reserve carried out two rounds of bond purchases known as quantitative easing.

That shows pessimism may increase before it becomes a signal to buy, according to Jeffrey Coons, president of Manning & Napier Advisors Inc. in Fairport, New York, which manages $44 billion.

“We’re not in an extreme environment of fear where you have readings you could look at in a contrarian way,” Coons said in a phone interview. “This low level of bullishness is another example of that pent-up demand for stocks. But we don’t really have the types of extremes that could give you that catalyst for fear reversal.”

‘Three Corrections’

The AAII’s weekly survey showed 28.7 percent of respondents were bullish on equities in the week ended June 27, the 13th consecutive time that optimism stayed below its historical average of 39 percent. The survey, which had 293 participants, has been conducted since July 1987.

The last time the percent of bulls was below average for this long was in the 14 weeks from December 2007 through March 2008. The S&P 500 went on to lose 38 percent that year.

“We’ve had three corrections since the second quarter of 2010, and each time we’ve asked whether we’re going to relive 2008 and it’s never happened,” Carey said. “It’s not that we can’t have more selling and short-term downdrafts, but for investors with a longer-term horizon, there are a lot of bargains in the market.”

Respondents in the AAII survey said the thing most likely to change their outlook on stocks would be resolution to the European sovereign debt crisis. Other events that would potentially damp pessimism included stronger U.S. economic growth and Congress addressing the so-called fiscal cliff, or the scheduled expiration of tax cuts and implementation of spending cuts at the end of this year.

Negative Catalysts

Potential negative catalysts were Europe’s crisis worsening and slower expansion in either the U.S. or China, the world’s two largest economies, the survey showed.

While bearish sentiment by individual investors has climbed, Wall Street strategists left their forecasts untouched for seven straight weeks through June 27. The average projection for the benchmark stocks measure at the end of this year slipped by 0.5 percent to 1,391 from the prior week, according to the average projection of 13 forecasters surveyed by Bloomberg on July 2.

Investors should bet on companies that have sales around the world, according to Kate Moore, the New York-based senior global equity strategist at Bank of America Corp. She listed Inc., Cairn Energy Plc and Bank of China Ltd. as some of the firm’s recommended stocks.

“Investors are incredibly reluctant to take equity risk,” Moore said in a television interview on July 28 on Bloomberg Television’s “In the Loop” with Deirdre Bolton. “You have to be able to be an investor and not a trader, because the trading environment is going to be very rough for the next couple of weeks.”

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