Good if You're Gloomy!

Are you feeling pessimistic about the market going forward? Well, if so, who could blame you? Stocks aren’t cheap. The Fed threatens to raise interest rates 4 times this year. China’s a mess, some say. Commodity prices are plunging and that says really bad things about the global economy, some say. It’s an election year and the current cast of characters represent a nightmare of uncertainty, I say.

So, again, are you feeling gloomy? Well good! That’s a positive signal for the market going forward. I know, crazy! But true. Read on:

The American Association of Individual Investors publishes the oft-quoted AAII Investor Sentiment Survey. Here’s their description:

The AAII Investor Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of the AAII membership on a weekly basis. Only one vote per member is accepted in each weekly voting period.

The long-term averages are: Bullish 38.67%, Neutral 31.06%, Bearish 30.27%.

Here are the survey results for the week ending 1/13: Bullish 17.9%, Neutral 36.6%, Bearish 45.5%. Dang!

So, assuming you’re gloomy, you’re right there with the pack. 

According to Bespoke Investment Group, that 17.9% is the lowest weekly bullish reading since April 2005, and it’s one of only 28 weekly occurrences—during the 29 year life of the survey—when bullishness read below 20%. Here’s what happened during the one, three and six month periods following each occurrence:

One month: Positive returns 70.4% of the time. Average return for all periods: +2.05%

Three months: Positive returns 92.6% of the time. Average return for all periods: +6.51%

Six months: Positive returns 96.3% of the time. Average return for all periods: +13.38%

So how can it be that when the individual investor is most pessimistic about the market, that the market tends—the great majority of the time (historically speaking)—to deliver handsome returns shortly thereafter?

Well, think about it: At what point would you expect folks to have the least exposure to the stock market and, thus, the most exposure to cash; when 83% of them are bullish or when 83% are neutral to bearish? And at what point would you say the market has the greatest odds of moving measurably higher; when 83% of investors are already in the market (bullish), or when 83% are flush with cash? You got it; when everyone’s sour on stocks, there’s plenty of cash to pile in at the first sign of a bottom.

So, yep, if you’re an individual investor, your market expectations should generally fly directly in the face of your mood. 

As for the moment; while yesterday and, especially, this morning, smelled (technically-speaking) bottomy, as I type oil’s trading lower and U.S. stock index futures are trading right along with it (Dow future down 139 points). Which, per yesterday’s presentation, is perfectly okay with me… 

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