A Sunny Investor Outlook Points to 14% Upside

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Bulls have regained control of the market…

The “scared money” environment we saw in October has vanished, and broad optimism has taken its place. Investors are once again chasing returns in assets like stocks, bitcoin, and even non-fungible tokens (“NFTs”)…

In short, the market is flipping from fearful to greedy.

Now, it’s healthy to be cautious when greed is on the rise… Too much can lead to crowded trades, bubbles, and, eventually, bear market busts. But history says we’re not there yet…

To see it, I’ll examine a major survey that shows the growing optimism among investors. And I’ll look at what similar survey readings have meant for stocks moving forward…

The sentiment measure I’m talking about is called the American Association of Individual Investors (“AAII”) Sentiment Survey.

This survey probes individual members of AAII for their market predictions over the next six months. Folks can identify as either “bullish,” “bearish,” or “neutral.” And AAII publishes their answers as a sentiment reading every week.

By tallying up the different survey answers, we can get a sense of the market’s optimism level. And today, bearish answers are tough to find. Take a look…

Today, just 22% of AAII survey respondents are bearish. And as you can see in the chart above, bearishness tends to bottom around this level.

I wanted to see what happened when we hit similar levels in the past. So I found every time the AAII’s bearish reading has dipped below 22% since 2000.

It’s uncommon for AAII surveys to have such low bearish readings. We had similar readings on just 13% of days in the past 24 years.

But stocks don’t typically struggle in the year following this signal. In fact, they tend to soar. Check it out…

Since 2000, stocks have returned an average of 5% a year. But buying on low AAII bearishness has led to even better performance. Similar readings produced an average return of 6% after just six months… and 14% after a year.

Plus, this signal has a great track record. We saw higher stock prices after a year in 77% of cases when AAII bearishness had sunk to this level.

In winning years, the average annual return was 41%. And in losing years, stocks fell 16%.

So while investors may be bullish today, it’s not a headwind for the current rally’s progress. History says that the opposite is probably true. The 22% bearish reading is likely to fuel higher prices from here.

It’s still not too late to go long. The data tells us investor optimism is a healthy development for this bull run. And based on what we’re seeing today, the market rally has plenty of upside left.

Good investing,

Chris Igou

This article was originally published on this site