"Stocks Are Going Nowhere In Next Few Years"
If you have been involved with the markets over the past thirty years, you
may find the sentiment statistics described in this article as the most surprising
you have ever seen. Recent investor sentiment readings have reached levels
of skepticism not seen since 1987, 2003, and 2009. If you know your market
history, you also know those are the three best buying opportunities over the
last 30 years.
Sentiment Can Be Helpful Near Extremes
When investor sentiment reaches extreme levels, it can be a contrary indicator
for the stock market. For example, the highest bullish reading in the history
of the American Association Of Individual Investors (AAII) Sentiment Survey
was 75% bulls before the dot-com bubble popped in 2000. To give you a reference
point, the average over the life of the AAII survey is 39% bulls. Sentiment
readings can also be helpful when they reach extreme levels of skepticism,
which is the topic we will explore in more detail below and tie it into the
present day.
This Has Happened Only Three Times Since 1995
The eight-week moving average for percent bulls in the AAII Sentiment Survey
recently dropped to an extremely low level in 2015, a level seen only two other
times since 1995. The other two times were two of the best periods to invest
in the last thirty years; early in 2003 and early in 2009.
In the chart above it is important to note we did not pick the comparison
periods; the data selected the periods. The comparison is based on facts, not
opinions. Since 1995, the recent reading has been seen only three times; 2003,
2009, and 2015.
Was 2003 A Good Time To Invest?
With similar skeptical sentiment to what we have seen recently in 2015, the
spring of 2003 offered a great investment opportunity from a short-term perspective.
As shown in the chart below, despite the "stocks are going nowhere" sentiment
of the day, the S&P 500 rallied from 800 to over 1100 in less than a year
(a gain of over 37%).
2003: From A Longer-Term Perspective
If you would have asked the average investor in 2003:
Is it possible for stocks to rally sharply over the next four years?
A common answer, based on the sentiment of the day, might have been "no way,
not going to happen". It did happen as shown in the 2003-2007 S&P 500 chart
below:
Was 2009 A Good Time To Invest?
With similar skeptical sentiment to what we have seen recently in 2015, the
spring of 2009 offered a great investment opportunity. In the wake of extreme
investor skepticism, the S&P 500 rallied from the March 2009 intraday low
of 666 to over 1200 in a little over a year.
What About Weak Market Breadth?
Regardless of what recent sentiment says from a probability perspective, you
may feel it does not matter since market breadth in 2015 has been noticeably
weaker. This week's video examines the questions:
How long and how far can stocks rise with weakening market breadth?...Is
it a showstopper?
Video: Market Breadth vs. The Weight Of The Evidence
Easy To Understand Skepticism After 1987 Crash
For those not familiar with Black Monday, the S&P 500 dropped over 20%
in one day. Therefore, it is very easy to understand investor skepticism reached
extreme levels after the 1987 stock market crash. What is surprising is that
2015 investor skepticism has reached an extreme level not seen since the period
following the 1987 crash. From MarketWatch:
For the past 15 weeks, neutral sentiment in the AAII Sentiment Survey
has registered above 40%, tying a record set in the wake of the Black Monday
market crash of 1987. Charles Rotblut, editor of AAII Journal, has noted
that unusually high readings of neutral sentiment typically coincide with
better-than-average returns for the S&P 500 Index
Similar Sentiment Post-Black Monday
If the record for weeks above 40% neutral sentiment is shared by the period
following the 1987 crash and 2015, a logical question to ask is what happened
next in 1987? The answer is stocks went up, not down.
1987: How About From A Longer-Term Perspective?
With extreme levels of investor skepticism, those who stepped outside of the
1987 groupthink category and remained with the stock market were handsomely
rewarded. If we asked someone after the 1987 crash "what are the odds that
stocks rally sharply over the next thirteen years", we may have been hit with
a "have you lost your mind?" response. Despite the widespread skepticism about
stocks, the S&P 500 came off the 1987 lows and rallied for the next thirteen
years.
2015: No Way Stocks Can Rally!
Things are awful in 2015: Apple is down after hours, Greece is still a mess,
the Fed is getting ready to raise rates, and earnings have been weakening.
There is no possible way that stocks can rally, right? The market will decide,
but things looked horrible after the 1987 crash, after the dot-com bust, and
after the financial crisis as well. Did stocks tank in those three cases with
similar sentiment to the present day? No, stocks did not follow the path that
most anticipated. Instead of falling, they not only rose, but rose significantly.
But, 2015 Is Different From 1987, 2003, and 2009
Yes, that is true. The same comment applies to all historical analysis
(bullish and bearish). This article has looked at two indisputable facts:
- The eight-week moving average for percent bulls in the AAII Sentiment Survey
recently dropped to an extremely low level in 2015, a level seen only two
other times since 1995. The other two times were two of the best periods
to invest in the last thirty years; early in 2003 and early in 2009.
- For the past 15 weeks, neutral sentiment in the AAII Sentiment Survey has
registered above 40%, tying a record set in the wake of the Black Monday
market crash of 1987; also one of the three best times to invest in the last
thirty years.
We did not cherry pick the data. The data picked the periods; 2015, 2009,
2003, and 1987.
AAII Survey Not The Only Evidence
We have seen similar and extreme bearish sentiment readings from other sources.
For example, the CNN Money Fear & Greed Index was at an "extreme fear" reading
of 22 a week ago.
Investor's Intelligence Survey Also At An Extreme Level
Ryan Detrick points out in a July
19 article that the Investor's Intelligence Survey recently hit an extreme
and rare correction percentage greater than 40%, meaning over 40% of newsletters
believe a correction is coming in the stock market. Ryan Detrick's article
shows S&P 500 returns have been favorable following such an extreme "correction" reading.
From Investor's Intelligence:
We study over a hundred independent market newsletters and assess each
author's current stance on the market: bullish, bearish or correction.
Since we have had just four editors since inception, there has been a consistent
approach to determining each advisors stance and his prior viewpoint.
How Is This Analysis Helpful?
From our perspective, this analysis is not about predicting what stocks will
do next. The value is simply that it helps us keep an open mind about all outcomes,
bullish and bearish. If we have an open mind, we can put plans in place for
bullish and bearish scenarios. Experience says it is dangerous to decide in
advance what the market is going to do, since it often does just the opposite.
For now, the primary trend in stocks remains up and the S&P 500 is stuck
in the same range it has been for months. If a correction is on the way, price
will not miss it. We are happy to adjust if and when needed. Given what we
know today, the evidence still calls for a equity-heavy allocation.
Recency Bias May Be A Big Factor In 2015
Why are investors so skeptical today? There are many factors in play, but
one of them may be recency bias. Investors "have seen this before".
Stocks rallied into the 2000 high, and then crashed. That was followed by
a rally into the 2007 highs; that too, was followed by a stock market crash.
From the 2009 lows, stocks have rallied and now it must be time for them to
crash again, right? History and the charts say that assumption may turn out
to be inaccurate. Only time will tell, but a detailed
analysis, "Stocks Could Surprise Significantly On The Upside In The Next
Fifteen Years", aligns with the sentiment analysis presented here and tells
us to keep an open mind about all outcomes.
