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Why bearish sentiment spike may be stock buy sign

Pessimistic feelings about the stock market's prospects surged to their highest levels in nearly two years, according to a new survey of investor sentiment, but that could actually be a positive sign.

For the week ending July 29, the American Association of Individual Investors found bearish sentiment jumped about 15 percentage points to 40.7 percent. With a historical average of 30 percent, readings above 40.1 percent are considered unusually high.

"I think there's a lot of frustration," said Charles Rotblut, editor of the AAII Journal. "We've certainly had more volatility in stocks over the past few weeks ... feeding on fears among some investors who are concerned that there's going to be a bigger drop in stock prices coming."

But, he told CNBC's "Squawk Box" Friday that "historically when we have seen low levels of optimism, that's been [paradoxically] correlated with better-than-average returns."

Read MoreSo bad, it's good for stocks: RBC strategist

The survey found bullish sentiment plunged by 11.4 percentage points to 21.1 percent, a seven-week low. It's the 21st consecutive week below its historical average of 39 percent, the longest stretch since 1993. Readings below 28.5 percent are considered unusually low.

Neutral sentiment fell 3.7 percentage points to 38.2 percent. But that's still above its historical average of 31 percent for a 30th consecutive week.

While the numbers have often eventually proved to be a contrary indicator, Rotblut said the latest results point to concern about valuations and earnings. "Among reported companies, we're looking at second quarter growth of about 1 percent."

Economist David Blitzer also sees slowing corporate profit growth. "Earnings are getting a little bit soft. The P-E [price-to-earnings ratio] is a little high. The pessimism comments don't surprise me. We need some big bang" to get the stock market going.

Blitzer, chairman of the S&P Dow Jones index committee, said there's been little U.S. news to move stocks, with much of the focus on overseas developments such as the Chinese stock market meltdown and the Greek debt crisis.

The will-they-won't-they Federal Reserve has also been keeping the stock market on hold, according to Blitzer, because it always seems like it'll be the next meeting when policymakers finally hike interest rates.

The Fed meetings in September or December are now seen as the best bets for liftoff.

Looking at the year-to-date return for the S&P 500, Blitzer said, "We haven't done a damn thing all year." The index was up 2.4 percent for 2015 as of Thursday's close, compared with last year's gain of nearly 11.4 percent and the near-30-percent rise in 2013.

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