New bull markets always play out the same way…
Investors are lukewarm at first. But as prices keep rising, they eventually get excited.
This isn’t the same kind of excitement you see late in a bull market, though. It isn’t folks throwing caution to the wind. Instead, that positive sentiment will quickly reverse at any sign of market weakness.
Folks saw that weakness in August. It was the S&P 500’s first month of losses since February. And it brought back painful memories of multiple losing months in 2022. Even professional investors bailed on stocks.
That’s nothing to worry about, though. Again, it’s what we’d expect to see early in a bull market… And according to history, this latest reversal could lead to 29% gains over the next two years.
Let me explain…
It’s crazy how quickly even the investment “pros” have thrown in the towel on the stock market…
Just a month ago, we looked at the National Association of Active Investment Managers (“NAAIM”) Exposure Index. It showed that these money managers were getting excited about the market. Today, it’s the complete opposite.
As a reminder, the NAAIM is a nonprofit organization that has brought active investment managers together since 1989. That includes polling its members weekly to find out how bullish they are on the markets.
It builds the results into the NAAIM Exposure Index. And like most sentiment gauges, it’s a useful contrarian indicator.
This measure showed that the pros were getting darn bullish in late July. The index hit a multiyear high that month. But it has collapsed since. Take a look…
The exposure index hit 102 in late July. Just four weeks later, it fell to 34. And what made that decline extreme was the pace and severity of the drop.
Specifically, this index plummeted by a massive 66% in just four weeks. That’s one of the largest four-week declines we’ve seen over the past 15 years. Heck, we’ve only seen six drops of this size or greater over that period.
The good news is that this kind of rapid decline in sentiment is a great opportunity to buy… not just for a few months, but for a few years. Here’s what happened after similar instances since 2008…
The last decade and a half has been great for stock investors. The S&P 500 was up 9% a year over that time. But you’re in for a treat if you buy after this kind of sentiment collapse…
Similar setups led to 5.8% gains over six months, 17% gains over a year, and 29.4% gains over two years. That’s major outperformance in all three time frames. This isn’t just a short-term buying opportunity, but a long-term one.
Even more, stocks were up 100% of the time a year later… and even two years later. So buying today isn’t a risky bet. The odds are firmly in our favor, based on 15 years of history.
This also proves that we’re in the early stages of a new bull market. Stocks have barely dropped… yet sentiment has collapsed.
It might seem odd at first, but that’s an incredibly bullish setup. And it’s why we want to have money in the markets right now.
Good investing,
Brett Eversole
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Source: Daily Wealth