Investors Turn Bearish: A Sign of a Market Bottom?

The American Association of Individual Investors (AAII) released its weekly survey of investor sentiment, with investors turning extremely bearish in the past week. Each week, AAII polls investors on their views of where the stock market will be in six months and each investor can only vote once.

Last week's data shows that only 28.7 percent of investors are bullish on a six-month timeline, as compared to the long-term average 39 percent of investors being bullish, as well as the previous 32.9 percent. Further, 44.4 percent of investors have a bearish view on the stock market in this period, up a whopping 8.5 percent week-over-week and well above the long-term average of 30 percent. Some 27 percent of investors reported as being neutral on the stock market, down 4.3 percent from the previous week and below the long-term average of 31 percent.

Extreme bearishness may actually be a net positive for the stock market. When sentiment bottoms, it generally also marks a bottom in stocks. For example, the index bottomed in the week ended March 5, 2009, as more than 70 percent of investors were bearish, just before the S&P 500 went on to double.

It is probably too early to call a bottom, as doing so would be very risky. However, if investors believe that market confidence is set to turn in the next few weeks, then they may consider buying stocks broadly -- SPDR S&P 500 SPY -- or even buying higher beta technology stocks -- via PowerShares QQQ QQQ or Technology Select Sector SPDR XLK.

Uncertainty may be one of the key reasons for this increase in bearish sentiment. The so-called known unknowns such as the future of the European debt crisis and the U.S. fiscal cliff might have kept sentiment tepid and could continue to weigh on sentiment over the next few months. One source of uncertainty, the Supreme Court's ruling on the Affordable Care Act, was just removed from the market as the Supreme Court largely upheld the entirety of the bill.