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There's a 98% Chance Stocks Will Be Higher in 90 DaysBy
Wednesday, September 1, 2010
Individual investors, it appears, are giving up on stocks...
Pessimism reigns now, as I've written recently in DailyWealth.
The thing is, you want to buy stocks when individual investors are extremely pessimistic... when there are no "bulls" out there. And that's where we are right now.
A major benchmark indicator of individual investor "non-bullishness" just fell to nearly a five-year low...
We've seen this indicator set up like this 48 times since 1987... And 47 times, stocks were higher three months later. The one time the market was down, it fell by only 1.6%. While there are no guarantees the same will happen this time, I like that historical record.
Let me show you the specifics...
Every week, the American Association of Individual Investors (AAII) polls its members. In its most recent poll, only 21% of respondents were "bullish."
My friend Jason Goepfert of SentimenTrader tracks these numbers. He found that, in the last 23 years, when individual investors have been this "non-bullish," stocks go up... One month after a reading this low or lower, stocks were higher 79% of the time. And stocks were higher 98% of the time three months later.
Jason says investors are not betting on a fall in stock prices. He says, "They're simply exiting... and probably going to cash or using the money for other purposes."
Jason tracks dozens of sentiment indicators, including surveys. And many of them are at pessimistic extremes similar to the AAII survey of individual investors.
(To name a few others at pessimistic extremes: The Investors Intelligence survey of newsletter writers, the Consumer Confidence Index from the Conference Board, the ABC News Consumer Comfort survey, the NFIB Small Business Optimism survey... You get the idea.)
As I wrote in a recent DailyWealth, it's always darkest before the dawn. Right now, based on a variety of surveys of consumers, it's pretty darn dark out there.
History shows us that buying stocks when investors are gloomy makes you money.
I can't guarantee you'll make money in three months by buying stocks today. But the historical record is pretty darn good... When things get as gloomy as they are today, 98% of the time stocks have been higher three months later.
"Be fearful when others are greedy, and greedy when others are fearful," Warren Buffett – the greatest investor in history – says.
Others are fearful now... whatcha gonna do?
Good investing,
Further Reading:
"Not only does it feel right to be bearish, it feels like an easy trade," writes our own trading guru Jeff Clark. "But here's the thing... Easy trades usually don't work out." Find out why he thinks betting on stocks falling is "too easy" here: If You're Betting Heavy on the Short Side, Read This.
Market NotesHOW TO MAKE 239% IN LESS THAN A YEAR In yesterday's note, we highlighted the 100%-plus gain in one of our favorite precious metals plays, royalty earner Silver Wheaton.
Just after that edition hit his inbox, our colleague Matt Badiali took us to task for not mentioning a way to make even bigger gains in gold and silver... the "junior resource" sector.
As we mentioned in the depths of the 2008 credit crisis, small mining stocks (called "juniors") have "moonshot" potential to generate hundreds and thousands of percent gains during a bull market in gold and silver. Juniors are the "bloodhounds" of the mining industry: They scour the world looking for big resource deposits. And they can skyrocket when folks get interested in gold and silver stocks.
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