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.
Paulsen says it's understandable that retail investors are skittish about stocks and are finding safety in bonds. "During this soft patch, people have been told nothing except that the economy has really slowed down. There's been a lot of hype on the debt ceiling and the potential downgrade. There's been a lot made out of Europe. It has its impact," he says. But as the old Warren Buffett proverb goes, be fearful when others are greedy and be greedy when others are fearful. "When everyone leaves the market, oftentimes it's a great indication that you're ready to go on another run in the market," Paulsen says. "People get scared and they make adjustments. If anything, it's a precise signal that it's the end of the soft patch. The fact that you're seeing some fund flows out is another sign that we're closer to the point of where we take off again." Investment-research firm TrimTabs cautions that there may be little time left to play the contrarian angle. TrimTabs' data show U.S. equity mutual funds went from taking in $11.3 billion in January to redeeming $21 billion in June. The flows have stopped deteriorating, though, which gives the firm pause. "Although they are still bleeding, the relatively light month-to-date outflow of $6.5 billion suggests the deterioration has halted," TrimTabs researchers wrote in a report Wednesday. "Less hate from mom and pop should displease bullish participants because retail investors tend to time the market poorly." Even so, Paulsen says the situation now is the exact opposite of what happened earlier this year, when inflows to domestic equity funds totaled $11.5 billion and $9.3 billion in January and February, respectively, according to data from ICI. "That was the top of the market, and it's no coincidence that the economy was good and people were feeling better," Paulsen says. "They were going into equities, and that wasn't a good sign. That was the start of the choppiness that started in mid-February." -- Written by Robert Holmes in Boston. >To contact the writer of this article, click here: Robert Holmes. >To follow Robert Holmes on Twitter, go to http://twitter.com/RobTheStreet. >To submit a news tip, send an email to: email@example.com.