Mutual-fund sales are a contrarian indicator of the stock-market’s direction for many investors. Look at how the previous peak of $1.7 billion roughly coincided with the end of the last bear market. If September’s redemptions are more than double the latter, might the bottom to the current bear bottom be at hand?

It’s important to look at the data carefully and to consider the current context. First, approximately half of the September outflows were from money market funds — so the flight from stocks was actually closer to $2.25 billion. That still beats the record, but by a smaller margin.

Second, a number of fund companies reported net inflows of money. As Som Seif, of Claymore Investments points out, this had a lot to do with new product offerings, i.e. segregated mutual funds used in variable annuities such as Manulife Financial’s IncomePlus.

People buying these popular instruments are looking for retirement income indexed to the upside of stock markets but protected from the downside — so to get a purer measure of sentiment, these inflows should be netted out. Roughly extrapolating from past data, the adjustment would bring industry net outflows closer to $3-$3.5 billion in September.

Thus, we may indeed be getting near the point of maximum pessimism and the bear market’s bottom. A caveat, though, is the once-in-a-lifetime nature of the current financial crisis, a “five standard deviation event” in which traditional signals and yardsticks may no longer be reliable guides.

Nelson, who is chairman of the Investment Policy Committee for Legg Mason Capital Management, thinks the bottom is in place because sentiment has reached a degree of negativity that in the past signaled a turnaround in the stock market. Earlier this summer, more than half of the persons polled in a Conference Board survey revealed they thought stock prices would decline this year. The percentage has never been as high since the survey began in 1987.

“Only six times . . . have 36% or more of respondents said they expected declines in the coming year,” reported Nelson. “In every case, the stock market confounded expectations by rising in the next year instead of falling . . . . The average gain of the six was +20.5%.”

Besides, “history also shows that even from a time standpoint both the bear and the economic downturn are getting into late innings,” continues Trapeze. “The markets topped out almost a year ago. But bear markets are relatively short-lived compared to bulls. The average duration of bear markets over the last 50 years has been 8 months. …According to Ned Davis Research, on average, bear markets bottom 4½ months before recessions end and several months before earnings trough.”

There is evidence that a bottom has been reached. Notes Trapeze: “Pessimism is rampant… Cash on the sidelines is a record $8.5 trillion, over 20% of all U.S. household assets …. Short interest is at record highs (18.1 billion shares at the end of June)…”

“Contrary indicators support a bottoming market. According to Merrill Lynch’s monthly survey, institutional investors are at a record underweight stocks and overweight cash. The put/call ratio … is high. There is a record number of new lows (1,304 NYSE new lows on July 15 vs. only 19 new highs), reflecting severe pessimism. The Volatility Index recently got through a high of 30. Investment advisory services are net bearish and corporate insiders, the ultimate contrarians, have stepped up their buying relative to selling, a very bullish indicator. New issues are at 2001 lows.”

“… market psychology has been as ugly as it gets and investors have been dumping small cap stocks, regardless of fundamentals. According to Ned Davis Research, small caps begin to outperform large caps 4 months before recessions end. A clear opportunity to any sensible investor … our energy holdings are at outstandingly low valuations. You had better believe big cap energy, which is having trouble reinvesting its outsized earnings, is looking at cheaper and faster‐growing small cap energy for investment opportunity.”