American «physicists» are extremely negative about the prospects of the stock market. Time to buy?
A very interesting picture is drawn on the US stock market in terms of investor sentiment. Every week, AAII (American Association of Individual Investors) conducts a survey among its members on the topic «is your attitude to the market for the next 6 months right now: bullish, bearish or neutral?» On Thursdays, publish the results: https://bit.ly/2EoJjdF
Yesterday’s survey results showed that the percentage of “bulls” was 20.9% — the minimum level since 2016. The percentage of bears was 48.9% — the maximum level since 2013. But for us, the Bulls / Bears ratio looks much more interesting (neutral answers do not participate). It was 0.43 (20.9 / 48.9). Values of this ratio below 0.5 (that is, when bears are more than twice bulls and higher) can generally be counted on the fingers in the entire survey history since 1987. The graph above shows the values of this ratio and the dynamics of the S & P-500 index for clarity. A value of 0.5 is highlighted with a blue dotted line.
What does this tell us, and how can it be used? It says that the American «Johns» and «Jane» are extremely negative-minded, and history shows that the «physicists» are more often mistaken than right at the moments of extremes. And this can be used as a context or “regime”, within which any buy signal has a better chance of success. But the key condition, all the same, is that this buy signal will have to wait.
Why do you need to wait and not buy, for example, as soon as you see such bearish moods? Unfortunately, there are no grails, as well as ideal indicators, which allow catching market minima with a 100% guarantee. For example, in 1990, 2002, and 2003, after the Bulls / Bears ratio for the first time went below 0.5, the market then dropped another 10-12% before turning up. And in 2000 and 2008, the value of 0.5 caused only a pause in the fall, and the real reversal happened when the S&P-500 index was still 40-50% lower.
In fairness, in most cases, such a bear sentiment still led to a quick (and sometimes instantaneous) reversal upwards. So it was in the most recent case, in 2016. When at the beginning of the year the S & P-500 index updated the 2015 lows, it seemed that the uptrend had ended since 2009. But just at that moment, the value of «Bulls / Bears» went below 0.5, and it became a pivot point, and the breakdown of the trend was ignored by the market. Given that now the S&P-500 even remained above the previous lows of the beginning of 2018, formally it still remains in an uptrend, and the chances that extreme sentiment will work look even higher than in 2016. But we would still be in no hurry, because the market, and the whole world is now in a state of such uncertainty, which has not existed for a very long time. Caution does not hurt, and certainly do not need to run headlong and buy «for everything».
While there remains a real risk that the market may fall into a bearish phase for a long time. Therefore, we believe that it would be more correct from the point of view of risk management to wait for confirmation of a reversal upwards on the S & PP-500 index. This confirmation, in our opinion, will be the breakdown of the level of 2800-2816 (this resistance is formed by local maxima in October, November and December). If the market is strong enough to go above this level, then, in combination with such negative sentiment of the American «physicists», this can create an excellent basis for a healthy rally for several months. Well, if it cannot, then it will be necessary to wait for new signals for a turn, and they may already be at lower levels.