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When Investors Fear the Worst: What It Really Means

Consumer nervousness over their stock portfolios is reaching an apex, which actually could mean good news for the market in the long run.

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The most recent Conference Board consumer confidencesurvey, delivered Tuesday morning, contained an interesting nugget about worry over the state of equities.

The report found that the percentage of those who believe stock prices are going to fall shot up from 32.4 percent to 42.6 percent.

The 10.2 percentage point surge represents something of a landmark.

Looking at data back to 1987, there have been only seven occasions where the rise in stock marketfortunes has eclipsed 10 percentage points in a month.

On six of those occasions, the Standard & Poor's 500 has gained after six months, with the average return at 10.2 percent, according to research from Bespoke Investment Group.

Add the Conference Board survey, then, to the list of reliable contrarian market signals.

"I would like to see more negative sentiment. Then the market goes up," says Nadav Baum, executive vice president at BPU Investment Management in Pittsburgh. "We're stuck in a trading range...You need to get that pessimism on the retail retail side to get the market to break out of the range."

On five of the seven times, the index has gained after three months with the average at 5.1 percent, though the one-month return has been a loss of 0.3 percent, with losses on four of the occasions, Bespoke found.

That latter figure—and to some extent the long-range effects of a sharp downturn in sentiment —jibes with the feeling of some market professionals who think investor worries are likely to escalate yet.

"There's a lot of bad news out there to digest," says Brian Gendreau, market strategist at Cetera Financial. "There's potential for sentiment to get worse before it gets better."

Other sentiment gauges reflect the feelings in the Conference Board survey.

Market bears outnumber bulls 36 percent to 33 percent, according to the latest American Association of Individual Investors poll, which found both levels above historical norms.

The Investors Intelligence Survey, which surveys newsletter authors, was the outlier, finding bulls in charge by a 37 percent to 26 percent margin last week.

But the most important gauge of all — where investors are putting their money — is strongly on the side of those who don't believe in stocks.

Mutual funds focused on U.S. stocks saw another $620 million of outflows last week, according to the Investment Company Institute, which said bond funds gained a whopping $3.6 billion.

In the Conference Board survey, investors expressed more jitters about their investments than they did even about their jobs, despite the 8.2 percent national unemployment rate and lackluster monthly payrolls growth.

The current conditions index is considered a reliable proxy for feelings about job security, and that portion actually rose from to a 46.6 reading from a 44.9.

That means, according to Amna Asaf at Capital Economics, that "households were more concerned about their equity portfolios than their job security."

"Looking ahead, the fall in gasoline prices should provide a short-term boost to real consumption," Asaf said. "But confidence could easily fall further if equity prices continue to tumble."

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