Most mom-and-pop investors are a fickle bunch…

They get bullish during the good times… but quickly turn bearish when times get tough. Their attitude toward stocks doesn’t come from deep research or tried-and-true investment philosophies.

Instead, most of these folks tend to let emotions guide their investing decisions. They react all too predictably to market fluctuations. So you can get a good idea of how they feel just by looking at what stocks did over the past month.

The S&P 500 Index has dropped 5% since early February. And sure enough, mom-and-pop investors turned bearish at one of the fastest rates on record.

The good news is, similar sentiment crashes have been a strong sign for stocks going forward. And that means we could see double-digit gains over the next year.

Let me explain…

I covered a big change in investor sentiment last month. It came from the American Association of Individual Investors (“AAII”).

The AAII sends out a weekly survey to mom-and-pop investors. It asks if they’re bullish, bearish, or neutral on stocks over the next six months.

From those results, you can build the “bull ratio.” That’s just the total number of bulls, divided by the number of bulls plus bears. (Basically, it removes the neutral responses to create a simple ratio.) A bull ratio of 100 is as bullish as possible. And a ratio of 0 is totally bearish.

The bull ratio peaked in February with a reading of 60. It was the first time there were more bulls than bears since the bear market began in 2022.

Things reversed quickly, though. The bulls fled in recent weeks as the market fell and fear took over. And during the worst of the banking-sector turmoil, the bull ratio dropped to about 28.

That’s already darn low on its own. But even more remarkable is just how quickly we got there… And that alarming speed is what makes this massive drop worth a closer look.

In just five weeks, the bull ratio fell 32 percentage points. That’s the largest five-week drop we’ve seen at any point over the past decade. Take a look…

The last time we saw a bigger five-week decline was all the way back in 2006. In fact, the bull ratio has only dropped faster 12 times since 1990.

So, the recent bullish-to-bearish swing is rare. And it means this is likely a good time to bet against the crowd.

You see, similar setups have led to fantastic gains over the following year. Take a look…

Stocks are an obvious long-term winner for investors. Since 1990, the typical annual gain has been 7.7%. But by buying in at times like these, you can nearly double those returns…

Similar setups have led to 3.4% gains in three months, 9.2% gains in six months, and 14.4% gains over the next year. Even better, stocks were higher a year later 92% of the time.

Individual investors are scared right now. They’re reeling from the one-two punch of a banking crisis and a slumping stock market.

But as contrarians, we see this sentiment switch as an opportunity. History shows fantastic gains tend to follow reversals like today’s. That’s why you want to start buying once the trend moves in your favor.

Good investing,

Brett Eversole

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Source: Daily Wealth