The bears are setting the stage for a shocker of a rally...
Folks everywhere are convinced that stocks are about to plunge.
Hedge funds have fled to safe-haven assets. According to the hedge-fund exposure indicator from our friends at SentimenTrader, they currently hold fewer stocks than at any time since the index began in 2003.
Commodity trading advisers have gotten bearish, too. Goldman Sachs reported last month that these traders had built a $47 billion short position – their largest-ever bet against stocks.
Even the options market is bracing for impact. Put options cost 35% more than call options today. That means options traders are paying a big premium to place bets that the market will fall.
But if the market rises instead, these bears will be squeezed... and many will have to buy in just to avoid more losses.
The smallest price bump could be enough to chase stocks higher. And that process may already be underway.
Let me explain...
The S&P 500 collapsed more than 10% from July to October.
It was a grueling period. Almost nothing seemed to work. But since then, stocks have found their footing...
The S&P 500 racked up an eight-day win streak through November 8. We haven't seen a daily streak this long since November 2021.
And importantly, the rally likely isn't over yet...
I wanted to know what this move might mean for the future. So I found every S&P 500 eight-day win streak going back to 1990. Then, for each instance, I tested how stocks performed going forward.
It's pretty rare for the market to rise for eight days in a row. We've only seen those win streaks 13 times over the past 33 years.
But a string of eight consecutive up days tends to signal more gains ahead. Take a look...
Stocks have returned about 8% a year since 1990. But buying on eight-day win streaks returned 9% annually.
While one extra percentage point of return may not be much to write home about, these streaks have been reliable indicators of a good year to come for stocks...
They kicked off an up year about 85% of the time. What's more, the returns in those winning years tended to be significant... The average performance was 14%, with a maximum return of 24%.
However, the less-common drawdowns after these signals were significant as well. Stocks fell an average of 14% in those down years, with a max drawdown of 19%.
It's also worth noting that there were only two negative signals. The first took place in April 2019 – a year before the pandemic dip. And the second was near the peak of the 2021 bull market.
But today's market sentiment couldn't be more different from the 2021 buying frenzy...
No one wants to touch stocks today. And that leaves a lot of potential buyers out there to chase prices higher.
This gives us a great contrarian setup in stocks today...
We have a serious sentiment washout. And we have a good risk-to-reward setup after the recent win streak.
The next market rally could go higher and longer than anyone is expecting... so make sure your portfolio is positioned to benefit.
Good investing,
Sean Michael Cummings
Further Reading
A late-stage bull market looks very different from one that is just beginning. Sentiment is fragile early on – like we're seeing now. And while it may not feel comfortable to buy when investors are fearful, that fear is more support for a contrarian opportunity in stocks... Read more here.
"History shows this 10% dip isn't the end of the world," Sean writes. The recent correction spooked investors. But over time, we can see that drawdowns like these are extremely common – even during the absolute best years for stock returns... Learn more here.
HIGHS AND LOWS
NEW HIGHS OF NOTE LAST WEEK
CBOE Global Markets (CBOE)... trading-exchange operator
Fair Isaac (FICO)... credit-score data analytics
Morningstar (MORN)... financial services
Progressive (PGR)... insurance
Microsoft (MSFT)... tech giant
Dell Technologies (DELL)... laptops and PCs
Adobe (ADBE)... cloud services
Akamai Technologies (AKAM)... cloud services
CrowdStrike (CRWD)... cloud security
Broadcom (AVGO)... semiconductors
Micron Technology (MU)... semiconductors
Uber Technologies (UBER)... ride hailing
Walmart (WMT)... "World Dominator" of discount retail
Cintas (CTAS)... uniform supplier
Abercrombie & Fitch (ANF)... apparel
O'Reilly Automotive (ORLY)... auto parts
Trane Technologies (TT)... HVAC manufacturer
Hilton Worldwide (HLT)... hotels
Motorola Solutions (MSI)... telecom
NEW LOWS OF NOTE LAST WEEK
Pfizer (PFE)... pharmaceuticals
Moderna (MRNA)... pharmaceuticals
Biogen (BIIB)... biotechnology
Best Buy (BBY)... electronics retailer
J.M. Smucker (SJM)... packaged foods
Hasbro (HAS)... toys and games
General Motors (GM)... automaker
Chevron (CVX)... oil and gas
First Solar (FSLR)... solar energy
Albemarle (ALB)... chemicals
