If This Indicator Hits "19" Tomorrow, Buy Stocks Hand-Over-Fist

Lou Basenese

Tuesday, September 21, 2021

James Surowiecki achieved bestseller status in 2004 with his book The Wisdom of Crowds.

His book tells us that, indeed, there is wisdom in crowds. That humans working collectively make more informed decisions than individuals.

But in the investment world, this is a total crock!

As Humphrey B. Neill observed, "When everybody thinks alike, everyone is likely to be wrong."

And there’s no better proof of this than investor sentiment.

In fact, as I alluded to last week, when bullish sentiment hits extreme lows, stocks don’t tank. They always rally.

And guess what? We’re only a few points away from such an extreme right now. So here’s what you need to know before the next reading hits tomorrow...

No Time For Love, Dr. Jones

Love is the last emotion that individual investors feel for stocks right now.

Case in point: Last week’s survey from the American Association of Individual Investors (AAII) reveals that only 22.4% of investors are bullish right now. That’s the lowest weekly reading since July 2020.

It’s also a massive drop from the 43.4% level it hit just two weeks ago.

As I’ve said, when virtually no one is optimistic about the stock market, that’s all the more reason to be bullish.

So if tomorrow’s reading hits 19.99% or lower, we need to back up the truck.

How can I be so bullish when everyone else is a bear? It’s simple. Because the data is undeniable.

Consider:

  • Since 1987, bullish sentiment has dipped below 20% on 31 separate occasions.
  • That’s more than enough occurrences to prevent anyone from trying to dismiss the findings as anomalies, or to ignore them because of a lack of frequency.
  • And 31 out of 31 times, the S&P 500 Index has been higher six months later.

And not by a small amount, either — but instead by an average of 12.7%.

Accelerated Profits

To put that average gain into perspective, the S&P 500 Index typically doesn’t return that much in a full year.

So when bullish sentiment really plummets, it represents an opportunity for us to essentially pick up a year’s worth of profits in half the time.

And who doesn’t want that?

Bottom line: You’re not going to find a more accurate contrarian indicator in the market. When bullish sentiment tanks, forget bailing on stocks. Instead, consider backing up the truck.

And with the latest reading within spitting distance of the key threshold, I suggest you be a contrarian and do what’s extremely unpopular. Buy stocks!

Six months from now, I bet you won’t regret it.

Ahead of the tape,
Lou Basenese
Lou Basenese

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