Five-Week Stock Rally Shaves Off Pessimism

From Bloomberg News

A five-week rally in U.S. stocks made financial newsletter writers the least pessimistic they’ve been in 11 years, according to a survey by Investors Intelligence. And that could be a problem.

The percentage of writers who were bearish, or pessimistic, fell for a fourth straight week, dropping to 20.9%, according to Investors Intelligence. The reading is the lowest since Feb. 7, 1992, and compares with 23.9% the previous week.

Bullishness, or optimism, rose to 56%, the highest since Feb. 23, 2001, from 54.4% the week before.

Those writers not bullish or bearish are expecting only a modest pullback in stocks.


The plunge in bearishness may help explain the 2.2% drop in the Standard & Poor’s 500 index so far this week, some analysts say: Historically, low bearish readings often mean stocks are due to fall, because there may be relatively little money left on the sidelines to jump in.

When the percentage of bulls is more than twice that of bears, as it is now, stocks drop 80% of the time over the next four weeks, with an average decline of 5%, said Chris Johnson, market analyst at Schaeffer’s Investment Research in Cincinnati.

“It’s been a very reliable indicator,” said Johnson. “And right now it’s not on the side of the market, that’s for sure.”

Investor sentiment rebounded as the military campaign ended in Iraq last month. The S&P; 500 finished last week 18% above its mid-March lows. The index gained for a fifth straight week, the longest such advance in almost nine months.

The gap between bullish and bearish opinions in the newsletter survey rose from 30.5 percentage points to 35.1 -- the widest since Feb. 5, 1999, according to Investors Intelligence, which uses information from about 110 newsletters for its weekly survey.

“Too much of the sentiment is going the same way,” said Bill Strazzullo, a market strategist at State Street Corp. in Boston. “That’s another thing that tells me this rally has topped out.”

The latest survey reflected sentiment expressed in newsletters from May 9 to May 16.