Market Optimism Falls, But It’s Usually Worse at Bottoms

Bullishness is fading on Wall Street--but maybe not fast enough.

A weekly poll of independent investment newsletter writers, reported Wednesday, shows the percentage who consider themselves bullish on stocks fell to 50.5% last week from 54.9% the previous week. The latest reading is the lowest since November.

The rest of the newsletter writers either are outright bearish (29.3% of the respondents last week, versus 28.3% the previous week) or expect a moderate further drop in the market in coming months (20.2% versus 16.8%).

Why root for a further thinning of the bullish camp? Because the poll, by Investors Intelligence of New Rochelle, N.Y., has been a great “contrary” indicator for the market over the last two decades.

When bullishness is high, it often coincides with market peaks, or at least periods when the near-term prospects for stocks often turn out to be mediocre.

That was the case in the spring and summer of 1999, for example, when the bulls stayed firmly in the majority in the Investors Intelligence poll. The Standard & Poor’s 500 index inched up just 1% between late April and late August of last year.

By contrast, when the bull camp tumbled to 41% in late September, that actually was a terrific time to be buying stocks--especially technology issues. The S&P; 500 surged 14% in the fourth quarter.

Or consider the bullish reading in September 1998, after Russia’s debt default: A mere 37.6% of the newsletter writers were bullish at the end of that month. Once again, that was a major market bottom--a great time to buy.

So with 50.5% of the newsletter writers still bullish, history suggests the market’s latest pullback hasn’t yet run its course: More of the “pros” still have to be scared into the bearish camp, and the only way to do that may be with another market slide.

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Still Too Many Bulls?

A weekly survey of more than 100 investment newsletter writers nationwide shows the percentage who are bullish on the stock market’s outlook fell to 50.5% last week, the lowest since November. The rest either are outright bearish or expect a relatively modest market decline. But bullishness still is well above levels that usually mark a market bottom--such as in September 1998. Month-end bullish percentages and latest:

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Wednesday: 50.5%

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Source: Investors Intelligence newsletter