Individual investors are incredibly scared right now…
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.)
[ad#Google Adsense 336×280-IA]You already know what happened to stocks after they bottomed in March 2009… They more than doubled.
While the stock market has soared, we still have plenty of value in stocks… Since company earnings have soared, 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 percentage of individual investors considering 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 this occurred 24 times in the last quarter century… And stocks were up three months later 22 out of 24 times (or 92% of the time).
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 8 years.”
Is there a 92% chance stocks will be higher in three or six months?
[ad#article-bottom]You can’t say that for sure… But it is true that based on history, when individual investors have become this scared after such a small downward move in stocks, stocks have been up 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 we look for in an ideal investment in place: Stocks will be 1) cheap, 2) hated, and 3) in 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 we’ll see it happen…
— Steve Sjuggerud
Source: Daily Wealth