Ordinary American investors are displaying levels of fear unseen in almost two decades, according to a survey conducted by the American Association of Individual Investors (AAII).

The latest poll by the association shows that just 19 per cent of investors categorise themselves as bullish while 59 per cent are bearish regarding the prospects for the US market.

The last time such a differential was recorded was in November 1990, after the S&P 500 had fallen almost 20 per cent after the Iraqi invasion of Kuwait and at the peak of a recession.

It shows "an almost unfathomable level of despair", according to Jason Goepfert, president of Sundial Capital Research and founder of the sentimentrader.com website.

Not even the bear market of 2000-2002, the biggest market fall since the 1930s, produced such a lop-sided reading.

Paradoxically, analysts are treating the latest survey as offering hope for market prospects in the medium term.

The AAII survey is regarded as a "dumb money" indicator, the theory being that ordinary investors become overly fearful in times of trouble and overly optimistic in sunnier climes.

In addition, pessimistic readings are taken to indicate that a lot of money is on the sidelines, waiting to be invested.

Typically, extreme readings are recorded after rather than before a significant market move.

A cursory glance at the statistics shows that there is more than a little merit to this contrarian interpretation. For example, only in the dying stages of the 2000-2002 market did bearish readings exceed 50 per cent. Before that, ordinary investors had continued to "buy the dips".

A rash of readings in excess of 50 per cent were registered in the summer of that year, representing a selling climax that saw the market bottom soon after.

Similarly, late 1990 proved to be a very good time to buy, with US indices climbing by 14 per cent during the first quarter of the following year and by an eye-popping 65 per cent over the following three years.

More recently, the corrections seen in 2004, 2005, 2006 and 2007 were all accompanied by bearish readings, typically at the tail-end of the market decline.

However, the latest reading is on a different scale. Mr Goepfert says pessimism has been growing of late, pointing out that the four-week average of the ratio is down to 35 per cent, "also the lowest reading since the 1990s".

His historical analysis should comfort disillusioned investors. "Over the survey's history, dating back to the summer of 1987, there have been a total of 26 weeks that showed a four-week ratio rivalling the current one, many of which were concentrated in the winter of 1990. The market tended to respond very well in the intermediate term, with the S&P showing a positive three-month return 92 per cent of the time and an average performance of 7.9 per cent."