Advisors Wax Optimistic on U.S. Stocks

Optimism about U.S. stocks rose for a 10th-straight week, a new record for a 35-year-old indicator compiled by Investors Intelligence newsletter.

The poll of investment advisors, conducted late last week, showed the percentage who considered themselves bullish, or optimistic, about stocks rose to 57.9% from 57% the previous week.

Optimism--often a contrarian market indicator--hasn’t risen to this level since the technical indicator reached 60% on Jan. 17, 1992. During that week, the Dow average rose 2.1% to 3,264.98. The average fell 1% the following week and 0.3% a week later.

“We’re edging closer and closer to dangerous territory, said Greg Nie, a technical analyst at Everen Securities in Chicago.

The proportion of advisors who considered themselves bearish, or pessimistic, about U.S. stocks fell to 29.8% from 31.6% the previous week, the survey found.

The rise in optimism “is a natural thing given the magnitude of this fourth-quarter rally,” Nie said.

The indicator had never risen more than eight weeks in a row until this month.

Technical analysts--who try to predict the market based on past performance rather than on company fundamentals such as profit potential--say a high level of optimism suggests investors may have little cash left to invest and propel stocks higher.

When pessimists significantly outnumber optimists, stocks may be poised to rise because this implies that investors are hoarding cash that can be invested in equities.

“The classic red-flag territory for sentiment is 60% bulls and 20% bears,” Nie said. “We seem to be headed there.”

The survey also found that the percentage of advisors expecting a 10% drop in stocks in the next 12 months, or a correction, rose to 12.3% from 11.4% the previous week. These advisors didn’t consider themselves pessimistic, although they weren’t as optimistic as those who called themselves bullish.

The put-call ratio, another indicator, doesn’t support the same view as the bulls and bears survey.

For S&P; 500 options, traded on the Chicago Mercantile Exchange, the ratio rose 1.02 to 2.27 on Wednesday. That means that the volume of puts--bets that stocks would fall--was twice the volume of calls--bets that stocks would rise.

Investors who watch the indicator say a put-call greater than 1.0--as it is now--signals that most speculators are pessimistic about the market.