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Why Investors Should Be Bullish on Stocks Now

BOSTON ( TheStreet) -- Retail investors are turning more bearish on U.S. equities, according to the latest data on sentiment and mutual fund flows, but one market strategist says it is time to be greedy now that others are fearful.

Investor sentiment worsened last week, according to a survey by the American Association of Individual Investors. The AAII Investor Sentiment Survey, which measures the percentage of individual investors who are bullish, bearish and neutral on the stock market for the next six months, showed that bearish sentiment rose 1.4% in the week ended July 20. That compares with a 0.5% rise in bullish sentiment and 1.9% decline in neutral sentiment.

Mutual fund flow data also show retail investors are steering clear of U.S. equities. The Investment Company Institute estimates that equity funds saw total outflows of $3.4 billion in the week ended July 13. Foreign equity funds had an estimated increase of $648 million, while domestic equity funds saw more than $4 billion drain out over the week.

The most startling statistic is that U.S. equity funds have now seen outflows of more than $3 billion in each of the past six weeks. In the week ended June 15, more than $6.8 billion flowed out of domestic equity funds, according to ICI's data.

Despite these massive outflows from equity funds, long-term mutual funds saw $2.47 billion in total inflows overall, according to ICI's estimates. With tepid economic growth and unemployment ticking higher, the soft patch in the economy has driven investors from equities into less riskier investments such as bonds.

Bond fund inflows totaled nearly $5.3 billion. Even without a deal in place to increase the debt ceiling and keep the U.S. from a technical default, investors are seeking the safe haven of the bond market. While the S&P 500 is up more than 1% today, the index has added less than 2% this month and just under 7% this year. The yield on the 10-year Treasury, meanwhile, has dropped from about 3.75% in February to less than 3% today.

"The equity outflows are unsurprising because of the soft patch of the economy and also because the stock market has been in a trading range since February," says Jim Paulsen, chief investment strategist with Wells Capital Management, an investment firm with assets of more than $350 billion. "It shows that people have caught up to what's happened in the rearview mirror."

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