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Plunge in stock pessimism may signal bottom: AAII

Bearish feelings about stocks have sharply declined as the market has recovered from the summer swoon, indicating the August lows may indeed hold as the recent bottom, said Charles Rotblut of the American Association of Individual Investors (AAII).

"Perhaps a bottom has been set and we won't see this correction turn into a bear market," Rotblut, vice president at AAII and editor of the AAII Journal, told CNBC's "Squawk Box" on Wednesday.

"There's just a big sigh of relief," he said, characterizing the responses for the AAII's most recent investor sentiment survey.

Stock market pessimism, measured by AAII, sank to about a three-month low last week, with bearish sentiment dropping to 27.1 percent, a decline of nearly 13 percentage points from the Oct. 1 reading.

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The Dow Jones industrial average, the S&P 500, and the Nasdaq composite tanked to their worst levels of the year on Aug. 25 and tested those lows over the next month or so. But since late September, the indexes have risen more than 7 percent.

"We did have some members who said they bought on the dips," Rotblut said. "We had other members say they actually went to cash or are staying out."

Bullish sentiment did fall last week to 34.1 percent, after the previous week's increase to the highest level since March. Neutral sentiment last week increased to 38.8 percent; more of the recent back and forth over the past month.

It's worth noting that sometimes when looking at investor sentiment in hindsight the numbers have turned out to be a contrary indicator of market performance.

AAII members expressed a general feeling the Federal Reserve should get its first interest rate high in nine years over with, Rotblut said. "The angst over when the Fed will raise rates is actually doing more harm, than actually just raising rates."

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The Fed meets next week, but a rate hike isn't expected until at least the December gathering. The futures market has been increasingly pricing in a hike for early next year as concerns about slowing economic growth and low inflation persist.

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