I wrote about the Merrill Lynch fund managers survey yesterday as a contrarian signal. Bret Arends at the WSJ has similar thoughts:

Is the stock market about to see a huge rally?

I know, I know. It just plummeted again. Am I crazy?

More importantly, only a sucker tries to predict short-term moves.

But the mood is so utterly bearish across the board right now that I am fighting the urge to turn into a raging bull.

Look at Merrill Lynch’s latest fund manager survey. Every month, Merrill surveys the biggest money managers around the world to find out what they think about markets and what they are doing with their own portfolio.

Right now they hate almost everything except cash. Merrill calls the new survey, out Wednesday, “one of the most pessimistic” ever. “Over the past month, fund managers have lost faith in global growth, commodities, China’s economy and emerging markets,” the firm reports.

Have past surveys been good contrarian indicators? Arends says yes:

The Merrill survey sometimes is an incredibly useful handbook for individual investors. It tells you what the big money crowd is thinking, and feeling, and where they have placed their chips. At market extremes, it is a wonderful contrarian indicator, or “magnetic south,” pointing in exactly the wrong direction.

Thus fund managers were hugely bullish on European equities 16 months ago, just before those markets collapsed, and hugely bearish on Japan back in the spring of 2003, just as it hit rock bottom.

What is the golf course test?

But some old stock market hands sometimes talk about the “golf course” test: Be wary of any asset that fund managers are bragging about on the golf course. In 1999, they were all boasting to each other about all the dotcom stocks in their portfolios. Last year, it was all their emerging markets stocks.

I am not a raging bull yet, but I am building a list of good companies that are on sale. Dividend yields for many blue chip companies are much higher than bond yields. Stock buyers today are finally being compensated for the risk of holding stocks. It is always uncomfortable to buy when everyone else is selling but it is the only way to buy low. Are we at the absolute bottom? I have no idea, but I’ve said all along that the economic situation is not nearly as dire as everyone seems to think. If that turns out to be true, this is a huge buying opportunity.