The 2012 Stock Rally Has Erased Bearish Sentiment

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At MarketBeat we like watching the weekly investor sentiment surveys for tidbits on how the broader market is performing. While these surveys have their flaws, they still represent a decent gauge for how investors are feeling about the current environment.

Considering the broad rally to kick off the new year, it shouldn’t surprise anyone that bullish sentiment is on the rise. Bullish sentiment jumped to 48.4% from 47.2% in the previous week, according to the latest figures from the American Association of Individual Investors’ weekly survey.

Meanwhile, bearish sentiment dropped to 18.9% from 23.6% a week earlier.

The folks at Bespoke Investment Group point out there have only been four weeks since the beginning of 2006 when bearish sentiment has been lower than current levels.

Two of those weeks came earlier this month, while the other two occurred in December 2010 and last January.

Interesting to note that bearish sentiment didn’t quite fall to these levels when the market topped in October 2007, or the most recent peak last May.

As Gongloff reported a few weeks ago, investors are talking like they’re bulls but investing as if they’re bearish. Same holds true now. ICI yesterday released fund-flow figures that continue to paint a bearish tone.

According to ICI, mutual-fund investors pulled $804 million from domestic equity funds during the second week of January, which more than reversed the $734 million of net inflows that went into those same funds a week earlier. These readings continue to show extreme reluctance among mom-and-pop investors to dive back into stocks.

Dow industrials were recently up 29 points, while the S&P 500 dropped 3 points and the Nasdaq Comp edged down 5 points.