Pessimism prevails among options traders and speculators, too. The cost of puts protecting against a 10 percent drop in the S&P 500 rose to a record on Aug. 24 relative to calls betting on a 10 percent rally, according to three-month data compiled by Bloomberg. While the spread has retreated to 12.76, it’s still up 30 percent from three months ago and higher than 99 percent of the time since 2005.

In futures tracking the S&P 500, bearish contracts outnumber bullish ones by the most in three years, data from the Commodity Futures Trading Commission show. Speculators increased short positions in stocks to the highest level since March 2009, according to data compiled by U.S. exchanges.

“When everyone is bearish, everyone is shorting and hedging, it’s generally a contrarian sign,” said David Kalis, co-chief investment officer who helps oversee $23.2 billion at Calamos Investments in Naperville, Illinois. The firm recently bought technology shares. “People are already positioned negatively so if anything goes right, markets can really have a good move.”

This bull market has seen the biggest rallies after periods of the worst sentiment. Bearish newsletter writers surpassed bullish ones three other times during the last 6 1/2 years, in April 2009, August 2010 and October 2011. All turned out to be buying opportunities as the S&P 500 rallied for two straight quarters each time, with gains exceeding 20 percent.

The last time sentiment soured as fast as it is now was June 1984, when the S&P 500 was close to completing a nine-month decline that was overshadowed by another round of rate hikes spearheaded by Volcker to tame inflation. As the Fed began easing in October, stocks advanced in the next five years.

Fed Decision

The Fed last week refused to raise interest rates, saying that economic and financial developments around the world may restrain economic activity and curb inflation. Chair Janet Yellen mentioned the outflow of capital from developing countries and pressures on emerging market currencies in her Q&A session.

While not sharing investors’ pessimism, Jeff Carbone at Cornerstone Financial Partners said he’s watching signs of further deterioration in sentiment to determine whether to trim stocks. His firm has bought technology and health-care companies in the past month after valuations shrank, reducing cash by about half.

“If the market drops another 5 percent, we want to dive deeper into, ‘is there a change in the economy?’” said Carbone, who oversees about $1.1 billion as the founder of Cornerstone in Charlotte, North Carolina. “Sentiment is something you’ve always got to look at -- did we miss something? If you are not in business long, you miss a lot.”

U.S. Strength