Can investor sentiment get any worse?

Another day, another big drop. When will the market finally turn around for real?

If anyone could accurately predict the exact date, he or she would already be a trillionaire. I don’t know any trillionaires.

But whatever the short term brings, the longer turn is looking much brighter, regardless of recession, credit crisis or bank failures. Why? Because the biggest bull markets spring from extreme pessimism. Investors were down in the dumps in 1982. I’m sure they were depressed in 1932 (we don’t have any good investor sentiment data from back then). Today, they’re as negative as they’ve ever been, far more so than in 1990 or 2003. On top of that, stock valuations are, by many measures, the cheapest they’ve been in decades, maybe ever. Cheap stocks and extreme bearishness—what could be a more bullish combination?

Merrill Lynch just completed one of their investor surveys. This firm's outlook is often cited as one of the best contrarian indicators: When Merrill is buying, you should sell; when Merrill sells, you should be buying. (I wonder if we’ll still be able to use the Merrill indicator once they’re absorbed into Bank of America?)

Currently, Merrill—and the fund managers they survey—are selling... everything. “Right now they hate almost everything except cash.” Even hedge funds are moving to cash. (One hedge fund manager says the best position to be in right now is CASH and FETAL.) Individuals are going so far as to take money out of banks and put the cash in safes (apparently, safe sales are up 50% this month). No one wants a whiff of risk. And no one seems to think anything will change anytime soon.

Which probably means it will.

Someone asked me today, “When will individual investors put their money back into stocks?” My answer: when they usually do, well after the market has recovered, and after the “smart money” has already made 30% or more by being invested when the rebound began. Since you don’t know when that will be, you’ve got to be prepared ahead of time, even if that means withstanding some huge price swings.

Stocks are historically cheap. Investors are terrified. Everyone thinks we’re on the cusp of another Great Depression. They buying opportunity of a lifetime? I think so.