Investors' crash fears good news for stocks

Stock trader Michael Pansegrau reacts at the German stock exchange in Frankfurt, central Germany, Friday, Aug. 5, 2011. Europe's debt crisis and fears over the U.S economy battered markets once again Friday, challenging vacationing European leaders to find a way to keep the turmoil from pushing Spain and Italy to financial collapse before a strengthened bailout fund can be put in place to help them.
AP Photo/Martin Oeser

The vast majority of retail and institutional investors say they're terrified there will be another stock market crash in the very near future, a new survey shows -- and that actually bodes well for stocks.

The latest reading of the Yale School of Management's Crash Confidence Index, which asks investors how confident they are that there will not be a market crash in the next six months, hit lows last seen two years ago. Only about 25 percent of institutional investors and just 15 percent of retail investors say they are confident stocks won't crash before summer.

The most recent survey shows just how nervous investors have become, says Bespoke Investment Group. However, as with most sentiment indicators, bad news is actually good news: Investors' dour mood is a good indication that the market will be just fine.

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"Early 2009 marked the low point in the Crash Confidence Index for both individual and institutional investors," Bespoke notes. "That was the point where the least number of investors were confident that there wouldn't be a stock market crash in the next six months." See the chart, courtesy of the Yale School of Management, below:

Yale School of Management

"Early 2009 was also when the market ultimately made its financial crisis low, so just when investors became the most fearful of a crash, the market was about to turn a corner and head significantly higher," Bespoke says.

Although there's a general consensus that the economy is in far better shape than it was back in 2008 and 2009, investors are having none of it.

"They are truly spooked," Bespoke says. "Fortunately, this is a contrarian indicator, which provides a reason to be bullish on the market going forward."

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    Dan Burrows, a veteran of Aol's DailyFinance, SmartMoney and MarketWatch from Dow Jones, covers the markets and economy with an eye toward investing for the long haul.