Bullishness at a 7-Year High, Whetting Bears’ Appetite

Bullishness about U.S. stocks hit a seven-year high of 60% last week, according to a survey of investment advisors released Wednesday, touching the level that many technical analysts believe could signal a market downturn.

The survey by Investors Intelligence newsletter of New Rochelle, N.Y., showed the percentage of advisors who considered themselves bullish, or optimistic, about stocks rose from 58.3% the previous week to match the level reached Jan. 17, 1992.

Technical analysts--who try to predict the market based on past performance rather than company fundamentals--and contrarians see rampant bullishness as a trouble sign, indicating that investors lack ready cash for stock purchases.

As Michael Burke, editor of Investors Intelligence, put it, “There are just too many bulls to make us happy right now.”

He cut his recommended equity fund weighting Wednesday to 40% from 80%.

Burke said he “wouldn’t be surprised to see an 8%-to-10% correction” in broad market indexes over the next month or two.

He added, however, that the latest results differ in one key respect from the high-optimism readings of August 1987 and January 1992 that preceded market downturns.

“In both of those previous surveys, the bears were down to around 19%, but now they’re hanging in there at 30%. Until we see more capitulation, I wouldn’t get too panicked.”

The last time optimism reached 60%, it signaled the end of a 12% climb in the Standard & Poor’s 500-stock index that brought the blue-chip benchmark to 420.77 on Jan. 15, 1992.

Last week, the Dow Jones industrial average advanced 5% to a record 9,643.32. The S&P; 500 gained 3.7% and the Nasdaq composite added 6.9%.

Contrarians note, however, that the market’s good fortune always shifts at some point.

With this week’s pullback amid jitters over the economies of Latin America, the next advisor survey could show bullishness backing off. The S&P; 500 has dipped 3.2% from Friday’s record close.

But for now, other technical indicators tell the same story as the Investors Intelligence survey.

Analysts also use put/call ratios--the number of put options on a certain index of stocks divided by the number of calls--as a gauge of investor optimism. Puts give the buyer the right to sell a stock or index at a certain price within a certain period, while calls confer the right to buy.

The Chicago Board Options Exchange’s composite put/call ratio averaged 0.51 for the last 10 days. Technical analysts say a value of less than 1 indicates that optimism is the ruling sentiment and suggests investors may be fully invested.

In mid-July, as stocks shot to records, the ratio’s 10-day moving average fell to 0.53. To technicians, that was an early sign that investors had become too optimistic and the market was in for a decline.

Jerry Wang, market strategist at Schaeffer’s Investment Research in Cincinnati, said the put/call ratio is “near the warning zone.”

He said that “novice contrarians should note that the ratio can stay low for months on end. The market can be overbought for a long time.”

Wang said the CBOE’s equity-only put/call ratio, now around 0.37, dipped even lower preceding the October 1997 and summer 1996 market pullbacks.

Wang said the most bearish signal would be for the ratio to linger in this range and then start rising. “When the reality sets in, when the market starts tumbling and then people start buying puts--as if to say, ‘Oops!’--that’s when it’s truly bearish and we react,” he said.