Right now, the herd is stampeding toward the exits.
The mainstream financial media is throwing one negative headline after another at investors, encouraging them to flee stocks.
No asset has been safe. Even Bitcoin’s price has been cut in half – as I forecast it would.
But while all too many investors are wringing their hands over the red in their portfolios, I’m spying the green shoots of an unprecedented opportunity.
One of my favorite, contrarian moneymaking signals is flashing “Buy!”
Why Herd Mentality Is Dangerous
At the end of April, the American Association of Individual Investors (AAII) Sentiment Survey showed that an astounding 59% of investors were bearish!
This was a new one-year high for investor pessimism.
It has since eased back to a 49% reading. And that means 49% of investors believe the market will be lower six months from now. That’s significantly above the long-term average of 30.5%.
A bearish outlook on the AAII Investor Sentiment Survey has topped 50% four times since the start of 2022.
Combine that with a reading of 12 on CNN’s Fear & Greed Index – which is actually up from a rating of 6 a week ago – and you have a wildly prevalent negative outlook on stocks.
With the way the broader markets have traded this year, that’s no surprise.
But moments of extremes like this are often moments of opportunity.
When the majority of investors see nothing but doom in their future, that’s historically been one of the clearest moneymaking signals.
Bears Are Rarely Right
Warren Buffett has famously said, “Be greedy when others are fearful and fearful when others are greedy.”
It’s really just a more poetic way of recommending a “buy low and sell high” strategy.
And I’ve always viewed extreme pessimism – or euphoria – as contrarian indicators.
I’ll demonstrate why…
Investors are more bearish now than they were during the market collapse in March 2020.
In fact, during the 12-week stretch from March to May 2020, bearish sentiment on the AAII survey topped 50% six times. The other six were all above 42%. But the highest bearish reading was 52.7% on May 7, 2020.
And that was after the S&P 500 had climbed more than 25% from its March 2020 lows.
The S&P would continue moving higher, setting new all-time high after new all-time high until our recent market collapse.
The bears were wrong.
Think back to the worst Christmas ever for the markets… Bearish sentiment on the AAII survey topped 50% on December 27, 2018.
Well, the bears were wrong again!
Six months later, on June 27, 2019, the S&P 500 had gained 19.5%.
On April 11, 2013, bearish sentiment topped 50%.
You guessed it… The bears missed again.
By October 11, 2013, the S&P had gained 6.5%.
During February and March of 2009, bearish sentiment on the AAII Investor Sentiment Survey was higher than 50% for weeks. It even hit an all-time high of 70.3% on March 5 – the day before the markets bottomed out during the financial crisis.
The bears got it wrong big-time!
Six months later, the markets were up 41.7%.
And that was the beginning of the longest bull market run in history.
Even earlier this year, on February 24, the AAII Investor Sentiment Survey showed a bearish reading of 53.7%. That was its highest level since 2020. But by April 5, the S&P had shot up 10%.
Time and time again, this level of negativity has been a buy signal.
Get Out the Wish List
The bears are rarely right.
That’s the big takeaway that I’m stressing here.
Don’t give in to panic as everyone else does. When sentiment dips into extreme territory, it’s time to start looking for the best discount stocks available.
You should have a wish list ready of all the companies you want to own a piece of that are now down 20%, 30% or 40% from their recent highs.
Bearish readings on the AAII Investor Sentiment Survey are a a contrarian indicator, particularly at these elevated levels.
Historically, when optimism is low, like it is now, the median gain of the S&P over the next 26 weeks is 7.1%. And over the next year, the S&P has posted a median gain of 17.9%.
Now is not the time to throw your hands up in frustration and make the mistake of moving to the sidelines.
This is a time to act… to realize that there are new opportunities and new profits to be made at sharply discounted prices.
Here’s to high returns,
Matthew
This article was originally published on this site