Note From Louis Basenese: Two weeks ago, I noted the nasty downturn in investor sentiment. Turns out my friend and colleague, Dr. Steve Sjuggerud, has noticed it, too. And he’s done some interesting research that I want to share with you on what the downturn could mean for stock prices over the next six months. The answer might surprise you…
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Individual investors are incredibly scared right now.
In fact, you have to go back to March 11, 2009, to find a time when the “Dumb Money” was more scared, according to Jason Goepfert’s main sentiment gauge. (Jason runs SentimenTrader, my go-to site for investor sentiment research.)
But you already know what happened to stocks after they bottomed in March 2009… they more than doubled.
And while the stock market has soared, we still have plenty of value in stocks. Since company earnings have climbed, many stocks are just as cheap today (relative to their earnings) as they were at the market bottom back in March 2009.
It took a 50% fall in stocks to cause individual investors to get so scared back then. This time around, it only took an 8% fall. I guess the memories of 2008-2009 are still vivid in the minds of individual investors.
Another main measure of individual investor sentiment recently hit its lowest level of the year. And what we’re seeing with this indicator has typically been great news for stock prices going forward. Let me explain…
The Bulls Are Waning… and That’s Good News
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The percentage of individual investors who consider themselves bullish in the American Association of Individual Investors survey hit 24% – its lowest level this year.
Jason Goepfert went back and studied every time the bullish-to-bearish ratio dipped below 34% at a time when stock market was within 7% of its highs. He found that this occurred 24 times in the last quarter century – and in 22 out of 24 times (or 92% of the time), stocks had risen three months later.
Six months later, the results were even better. Stocks were still up 92% of the time. But they had a median six-month return of 7.1%, well above any random six-month period.
About these results, Jason says, “The only real failure was in early 1990, as the economy was just entering the first recession in eight years.”
So is there a 92% chance that stocks will be higher in three or six months?
When These Three Things Happen… Buy Stocks
You can’t say that for sure. But it’s true that based on history, when individual investors have become this scared after such a small downward move in stocks, stocks have risen 92% of the time three and six months later.
Yes, it’s certainly scary out there. The long-term trend is trying to turn down. And bad news is everywhere, from the home front to across the pond in Europe.
But I see great possibilities here. If the trend can turn back around, we’ll be in a rare situation. We’ll have all three things that we look for in an ideal investment: Stocks will be cheap, hated and at the start of an uptrend.
The best time to buy is when those three things come together. We already have No. 1 and No. 2 above. We just need No. 3 – and then it’s the ideal time to buy stocks.
Based on Jason’s sentiment indicators, there’s a good chance that we’ll see it happen.
Editor’s Note: This article was originally published in Daily Wealth. To read more from Steve Sjuggerud and the rest of the Daily Wealth team, check our their website at www.DailyWealth.com