The bears came out in full force at the end of October...
We had seen months of stock market declines. We were approaching the first correction of this new bull market. That left folks questioning if a major decline was underway.
It was a quick reversal from the bullishness we saw when stocks hit their July high. But then, the bearishness vanished even faster than it showed up.
According to a specific measure, the bears just went from being the majority to hitting their lowest level in six years.
Normally, that would be a bad sign for stocks. But according to history, we don't have to worry. The market can do just fine in the months to come.
Let me explain...
If you want to know what mom-and-pop investors think about the market, the American Association of Individual Investors ("AAII") Investor Sentiment Survey is one of the best tools to use.
The nonprofit organization sends this survey out to individual investors each week... And their survey responses let us know if they're bullish, bearish, or neutral on stocks over the next six months.
The percentage of bearish investors hit a multiyear low when stocks peaked this summer. Those folks became the majority in early November. But that bearishness has collapsed again. And this time, it hit a six-year low. Take a look...
We've seen no shortage of big sentiment shifts in recent years. But it's worth paying attention to the lows we've seen in recent weeks. That's because it was the lowest level of AAII bearishness since early 2018.
We'd typically see this setup as a contrarian signal – that is, we'd expect stocks to perform poorly after bearishness collapses. But history shows that isn't likely this time...
After the recent collapse to below 20% bearish responses, we saw a slight jump from that level. I looked back to see what happened after similar cases... specifically, when the AAII bears fell below 20% and then rose back above that level.
That has happened 34 other times since the data began in 1987. And stocks tend to perform right in line with history in the months that follow. Check it out...
Just buying and holding stocks has been a great way to build wealth over the past few decades. The market has risen 8.5% per year over the past 36 years. But buying when sentiment is largely bullish – like today – wouldn't have killed those returns...
Similar setups led to 4.4% gains in six months and 8.4% gains over the following year. Those returns were in line with a typical buy-and-hold strategy. Even better, the market was up 76% of the time a year after these instances.
You might look at the market today and worry that the rally is over. But we shouldn't expect the recent "flight of the bears" to slow down the gains that are underway... let alone cause a major decline.
Stocks have continued to rally, folks. And the trend is in our favor. That means more gains are likely as we head into the new year.
Stocks shifted from "oversold" levels in late October to "overbought" territory last month. Normally, it can take months – not weeks or days – for sentiment to reverse. But history tells us this kind of quick change is a good sign for the market... Read more here.
The CBOE Volatility Index is one of the easiest ways to measure investor fear. We saw plenty of fear in the market in October. But now, this indicator shows panic is starting to subside. And according to history, that's a bullish case for the broad market... Learn more here.