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Market Preview: When Bearishness is Bullish

Tickers in this article: GE SPY ^DJI CMG ^GSPC ^IXIC MSFT GOOG SNDK

NEW YORK ( TheStreet) -- The stock market is enjoying a bit of a bounce since the start of earnings season but retail investors aren't buying it.

The latest American Association of Individual Investors sentiment survey for the week ended Wednesday found just 22.2% of respondents identifying themselves as bullish about where the S&P 500 is heading over the next six months.

That's a decline of 8 percentage points from last week, well below the historical average of 39% and the lowest bullish reading since August 2010. The AAII has roughly 150,000 members but doesn't disclose how many participate in the survey each week.

Thirty-six percent of those polled said they were neutral, up a percentage point from last week, while 41.8% identified themselves as bearish, a jump of 7.1 percentage points.

The good news though is that stocks tend to do quite well when the little guy gets really bearish.

Mark Arbeter, chief technical strategist at S&P Capital IQ , pegged the AAII results as one of the positives emerging for U.S. equities right now in a Thursday follow-up to his rally call late last week.

"Considering that the '500' just went through a 10% haircut, we would not have anticipated such a low sentiment reading," he wrote. "Like strategists, analysts, and investment gurus, individuals are watching too much TV, reading too many bearish headlines, and not paying attention to the charts, in our opinion."

As previously stated, Arbeter thinks the S&P 500 has some room to run at current levels with the next area of resistance in the 1400-1422 range. On Thursday, he said the charts are look set up for a strong end to the year with a break above the post-financial crisis high of 1422 in April opening the door for the index to wrap up 2012 in the high 1400-low 1500 area.

"We think the stock market may be emerging from the typical choppy bottoming formation and into a very fluid move higher," he said. "This potential 'sweet spot' of many 5-wave advances usually sees many weeks of consistently higher prices, where pullbacks are bought, and investors with cash are left sitting on the sidelines waiting for decent-sized pullbacks that never materialize. We saw these fluid moves in the 2010/2011 rally as well as in 2012. We believe it also forces bearish institutional investors to allocate capital toward stocks and bearish strategists to upgrade their opinions, fueling further gains in stocks."

Among the other positive signs that Arbeter points out are the NYSE advance/decline line recently hitting an all-time high, a number of Wall Street strategists recommending a low asset allocation to equities and breakouts in some mega-cap stocks from decades-long bases to new all-time highs.

Arbeter also notes the action in the S&P 500's counterparts measuring the performance of small- and mid-caps is shaping up well, as is the path traced by the Dow Jones Transportation index.