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Investment Advisers Are Bullish on Stocks. Uh-oh.

A poll of investment advisers' attitudes toward the stock market and economy by the Charles Schwab discount stockbrokerage (SCHW) tells the same story as other recent sentiment surveys: that bullishness is pervasive, perhaps dangerously so.

The survey of 1,337 registered investment advisers, taken in late January, found that 77 percent expected the Standard & Poor's 500-stock index to rise in the next six months. That figure has been surpassed only once, in the first edition of the survey in January 2007, and then by only 1 percentage point. Just 12 percent of advisers anticipate a decline, with the rest predicting that the index will stay the same.

The Schwab results conform to those of other polls highlighted in recent posts, including the monthly Merrill Lynch survey of global fund managers, the Investors Intelligence survey of investment newsletter editors and the one compiled by the American Association of Individual Investors. Among other indicators of extreme enthusiasm - for stocks or other assets - are a new book on flipping houses and reports that Twitter, which loses money regularly, was being valued as high as $10 billion.

Sentiment indicators like these, formal and anecdotal, are treated as contrarian indicators, with extreme bullishness negative for a market and vice versa, for two reasons. Such extremes in sentiment tend to be reached only after a trend toward improving or deteriorating economic and corporate conditions is well established, obvious to all and due for a reversal; the world has a way of moving in cycles that is inconveniently forgotten at key turning points. Then there is the sheer weight of money; when an overwhelming proportion of investors have already bought or sold the market, there is generally little buying or selling left to be done to perpetuate the move.

One of the more interesting developments highlighted in the Schwab survey is an ebbing of nervousness that financial advisers detect in their clients. Two years ago, close to the bottom in stocks, advisers said that, on average, 49 percent of their clients - the most ever - "needed reassurance about reaching their investment goals." The most recent figure is 23 percent, which by scary coincidence is the same as in July 2008, just before the stock market suffered its worst collapse since the flapper era.

Advisers similarly reported substantially increased optimism among their clients about their investments and the economy. Fifty-six percent of respondents said that their clients were more optimistic about their investments than they were six months ago, and a mere 6 percent found less optimism. The corresponding figures for their clients' outlook on economic conditions were 53 percent and 7 percent.

Some of the data in the Schwab survey is open to varying interpretations. It's hard to know how valid the opinions are that advisers report for their clients. The advisers could just be assuming to some extent that their clients see the world the same way they do.

It's also uncertain whether the survey should be treated as a contrarian indicator in the way that others are. In January 2009, when financial Armageddon seemed to be just around the corner, nearly twice as many of the advisers that Schwab polled thought that the stock market would rise as fall. The majority were decidedly right.

The ratio is far more lopsided now, however, with the ratio of bulls to bears at more than 6 to 1. The preponderance of other indicators of euphoria in the market cannot be ignored either. This remains a time for extreme caution.

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