Sunken sentiment: Investors fear 1987-like fall

Published Wed, Sep 30 201511:41 AM EDT

Investor sentiment is continuing to deteriorate, according to surveys and Wall Street market strategists. "The bulls dipped further to 24.7 percent, from 26 percent a week ago. That is a big drop from late April when the bulls were 57.4 percent," John Gray of Investors Intelligence wrote in a note to clients Wednesday. "We now see optimism below the March 2009 low of 26.4 percent." Fundstrat's Tom Lee met with investors in Boston on Monday and found the qualitative level of fear was even worse than what the sentiment stats implied. "A surprising number see this as 1987 again and 1998. Most portfolio managers expected equities to fall below the August lows. Monday's mood was worsened by tumbling tape, but many talked about how this felt like 1987 to them," Lee wrote in the note to clients Wednesday. The Dow Jones industrial average lost 23 percent on October 19, 1987, on a day that's become known as "Black Monday." "Ultimately," Lee added, "investors question the ability of the world to grow without China. A recurring theme in the meetings is the skepticism, and therefore, pessimism about world growth with China slowing." Here's why the dire negativity may present a buying opportunity. "The time to buy is when there's blood in the streets" is one of the oldest market adages, and contrarians are getting ready to take advantage of a relief rally. Gray believes increasing bearish sentiment by investors is a positive sign for the market as selling leads to more buying power from clients now with higher cash levels. The theory goes that if so many people are bearish, there's not many left to sell so the market should be ready for a turn. Read More Top analyst: Buy McDonald's on all-day breakfast "Overall the advisors remain nervous and skeptical. That should prove positive ultimately as it signals they are/have raised cash. Remember that sentiment is a leading market indicator. Tops can take months to form but bottoms often form more quickly," Gray wrote in a Sept. 16 note. To prepare for a contrarian market rally, Chris Verrone of Strategas told clients to look at the year's underperformers. "Historically, year-to-date laggards tend to outperform year-to-date winners in October and November and some leaders have been clipped lately," Verrone wrote in a note Wednesday. Read More JPMorgan: Buy into the biotech bear market Here are 10 laggard stocks in the S & P 500 that could be fertile ground for any contrarian rally.

A trader on the New York Stock Exchange holds his head on October 19, 1987 as stocks were devastated during one of the most frantic days in the exchange's history.

Maria R. Bastone | AFP | Getty Images

Investor sentiment is continuing to deteriorate, according to surveys and Wall Street market strategists.

"The bulls dipped further to 24.7 percent, from 26 percent a week ago. That is a big drop from late April when the bulls were 57.4 percent," John Gray of Investors Intelligence wrote in a note to clients Wednesday. "We now see optimism below the March 2009 low of 26.4 percent."

Fundstrat's Tom Lee met with investors in Boston on Monday and found the qualitative level of fear was even worse than what the sentiment stats implied.

"A surprising number see this as 1987 again and 1998. Most portfolio managers expected equities to fall below the August lows. Monday's mood was worsened by tumbling tape, but many talked about how this felt like 1987 to them," Lee wrote in the note to clients Wednesday.

The Dow Jones industrial average lost 23 percent on October 19, 1987, on a day that's become known as "Black Monday."

"Ultimately," Lee added, "investors question the ability of the world to grow without China. A recurring theme in the meetings is the skepticism, and therefore, pessimism about world growth with China slowing."

Here's why the dire negativity may present a buying opportunity.