As Warren Buffett once said, “Be fearful when others are greedy, and be greedy when others are fearful.”
Timely advice considering that last week, while the debt crisis in Greece unraveled – and politicians in the United States deadlocked on deficit talks – stocks marched higher, undeterred.
The S&P 500 even accomplished the rare feat of logging gains every day.
And fortunately for us, that positive momentum carried right on into this week, despite the debt contagion spreading into Portugal.
Here’s the really good news, though. Research shows that when fear runs high in the market, stocks keep marching higher. Here’s why…
When Investors Panic… Stocks Rally
Citi strategist Tobias Levkovitch’s proprietary Panic/Euphoria model blends nine indicators of investor sentiment. A week ago it entered “panic” territory, which historically indicates that stocks will soon rally.
More specifically, his model suggests there’s a 90% chance that stocks will be higher in six months… and a 97% chance they’ll be higher in 12 months.
Other contrarian indicators lead to the same conclusion, too.
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Consider Bespoke Investment Group’s “Drudge Headline” research.
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It monitors the headlines on the popular news portal, the Drudge Report, which gets about 30,000,000 page views per day.
Since it’s not a financial news site, gauging the number of times a finance story grabs the top spot provides an indication of when Main Street is truly concerned about Wall Street.
Interestingly enough, when financial headlines appear most frequently – i.e. when Main Street’s most afraid – stocks tend to rally.
In fact, the frequency of financial news stories spiked dramatically right before the market bottomed in March 2009.
And wouldn’t you know? In recent weeks, the number of finance-related Drudge headlines hit the highest levels since the throes of the recession.
Now, if you’re reluctant to trust these sentiment indicators, just remember this: the underlying market fundamentals point to higher prices, too…
Stocks are reasonably priced, trading for about 15 times earnings… corporate profits continue to expand at a double-digit clip… and mergers and acquisitions activity is heating up, with the total value of deals jumping by 71% in the first half of this year.
Bottom line: Shake off the fear-ridden headlines in the face of solid market fundamentals. That just means it’s time for us to be greedy.
Ahead of the tape,