Individual investors are increasingly bearish, and some institutional investors see that as a good omen. Smaller investors are as pessimistic as they've been in a year, according to a survey by the American Association of Individual Investors. Meanwhile, mutual funds, pensions, and endowments are spending more on stocks than at any time since the start of the bull market. The last time money managers and individuals were this far apart was at the beginning of 2009, just before the Standard & Poor's 500-stock index began a 63 percent rally, data compiled by Bloomberg show. "It's been the individual investor that's been a good contrarian indicator," says Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott.
Stocks represented 68 percent of institutions' holdings in July, the most since April 2009, a Citigroup (C) survey shows. The ratio of bullish to bearish individuals responding to the AAII survey fell to 0.68, the lowest reading since July 2009, based on a four-week average. AAII's measure of pessimism peaked on July 8 at 57 percent.
Some money managers believe that worries about a double-dip recession, which have rattled the markets since April, have driven stocks too low. Bill Miller, chairman and chief investment officer of Legg Mason Capital Management, recently sent investors a letter calling this a "once in a lifetime opportunity" to buy shares of large U.S. companies. Individuals have pulled $41.2 billion from mutual funds that hold U.S. stocks since April 2009 and have piled more than $470 billion into bond funds, according to Investment Company Institute data.
Says Janney Montgomery Scott's Luschini: "The stock market will continue to advance...ultimately pulling along retail investors notorious for buying high and selling low."
The Bottom Line: Sentiment among individual investors can be a contrary indicator, so their skittishness may bode well for the stock market.