By Rebecca Quick Reporter
CNBC
updated 3/25/2004 6:13:47 PM ET 2004-03-25T23:13:47

A ballooning deficit, terrorism concerns and some less-than-cheery economic news have started to take their toll on the stock market and investor sentiment over the last few months, but there are still plenty of Wall Street analysts who say we’re only seeing the beginning of a wall of worry heading our way.

The weekly Investors' Intelligence survey, the granddaddy of market sentiment polls, showed a big drop in the number of investors who consider themselves bulls.

In the week ended March 19, just 45.5 percent of professional investors called themselves bullish, while 23.2 percent called themselves bears. That may not sound like a big deal, but consider that the number of bullish financial advisers dropped by 13 percent from a week earlier.

Video: Wall Street worries And the turnaround in sentiment ends a big streak for the bulls on Wall Street. Before the most recent report, more than 50 percent of professional investors identified themselves as bulls for 46 weeks in a row.

Investor optimism is widely seen as a contrarian indicator.

In general, investors tend to feel the most bullish before a market crash, and the most bearish before a big run-up in stock prices. But despite this recent drop off in investor optimism there are still plenty of analysts who say this is only the beginning of a wall of worry for Wall Street.

“We look at the numbers and when they are extremely pessimistic for periods of time it usually coincides with a market low,” said Steve Hochberg of Elliott Wave International, a financial market forecasting firm.

“All we’ve had right now is one week of down ticks,” Hochberg continued. “So we’ve just started the decline and we need to see a lot more in terms of a market decline and extreme pessimism in sentiment before we’re anywhere near a bottom.”

Historically speaking, that has been the case.

Back in 1974, before the market bottomed out of a bear market, bears outnumbered bulls on the street for 27 weeks in a row. But Bob Benson, an economist at Bank of America in St. Louis, thinks that this time around things will be a little different.

Benson says that the market’s fundamentals are more important that investor sentiment and he’s watching company cash flow very closely.

“If U.S. corporations continue to generate positive cash flow relative to the price of their stock, stock prices will continue to climb higher,” Benson said.

Benson thinks that over the rest of this year, you could see low double-digit gains for both the Dow Jones industrial average and the Standard & Poor’s 500-stock index.

Benson’s a little less optimistic when it comes to the Nasdaq Composite index, because the technology sector has had a strong run over the past year. But he still thinks the tech-loaded index can finish the year in positive territory.

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