{"id":7319,"date":"2018-12-23T15:01:07","date_gmt":"2018-12-23T20:01:07","guid":{"rendered":"https:\/\/www.zacksim.com\/?p=7319"},"modified":"2022-02-27T17:55:06","modified_gmt":"2022-02-27T17:55:06","slug":"investors-panicking-make-bullish","status":"publish","type":"post","link":"https:\/\/zacksim.com\/financial-professionals-insights\/investors-panicking-make-bullish\/","title":{"rendered":"Why Investors Panicking Should Make You Bullish"},"content":{"rendered":"

Investors are getting increasingly edgy and bearish as stock market volatility continues apace, which is actually having the opposite effect on me \u2013 it\u2019s making me more bullish. In this week\u2019s column I\u2019ll explain why I feel that way, but first I\u2019ll unpack some of the sentiment indicators \u2018flashing pessimism.\u2019 <\/p>\n

You can find evidence of investor bearishness\/skepticism in many places. Watching the news for one! However, there are also a few sentiment indicators available to give us a good idea of sentiment in the marketplace. <\/p>\n

One such gauge comes from The American Association of Individual Investors (AAII). Late last week, they said that bearish sentiment \u2013 which is measured as the expectation that stock prices will fall over the next six months \u2013 soared 18.4% to 48.9% in just a week\u2019s time. The AAII noted that 48.9% is the highest bearish reading since April 2013, and it also marks the 10th straight week that bearish sentiment has been above the historical average. <\/p>\n

Similarly, the AAII said that bullish sentiment \u2013 which is measured as the expectation that prices will rise over the next six months \u2013 fell 17% to 20.9%, its lowest level since May 2016.[1] <\/p>\n

Over the last few weeks, investors appear to be responding to the negative sentiment by shifting away from equities and \u2018running for the exits,\u2019 so to speak. According to Lipper, weekly outflows of US-based stock funds hit a record in the week of December 10, and it follows that bonds have outperformed stocks by 8.24% in the 20 trading days leading up to December 18. On a relative basis, this is close to the weakest performance for stocks relative to bonds over the past two years.[2] And as if you didn\u2019t need any more evidence of bearish sentiment, I\u2019ve got one more \u2013 investors have been buying puts and selling calls at some of the highest levels seen in two years.<\/p>\n

Why This Investor Behavior Makes Me More Bullish<\/strong><\/p>\n

It is fairly obvious that today, pessimism is unusually high and optimism is unusually low. There aren\u2019t a whole lot of investors asking what they should buy today, as the conversation is more geared towards whether it\u2019s time to sell or go defensive in portfolios. <\/p>\n

However, remember the adage that investors should be \u201cfearful when others are greedy and greedy when others are fearful\u201d?[3] I believe that it still applies today! In my view, the current investment environment has all of the classic marks of a correction \u2013 a short-term, emotionally-driven pullback with a characteristic disconnect: fear and worry running high with economic fundamentals remaining reasonably strong. That disconnect is precisely what I think we\u2019re seeing today. <\/p>\n

Historical data suggests that bearish investor sentiment is not a good indicator for bearish future returns. Earlier I noted that the last time investors were this bearish was back in April 2013, but take a look at what the S&P 500 did in that year:<\/p>\n

As Investors Got More Fearful, Stocks Continued Climbing<\/strong><\/p>\n

\"\"
\nSource: Federal Reserve Bank of St. Louis<\/p>\n

We saw a similar outcome in 2016. When bullish sentiment in that year dipped to levels as low as we\u2019re seeing today, stocks still managed to track higher:<\/p>\n

\"\"
\nSource: Federal Reserve Bank of St. Louis<\/p>\n

Bottom Line for Investors<\/strong> <\/p>\n

It\u2019s been a difficult few weeks for stock investors, and I empathize with the difficulty of remaining patient as the ups and downs \u2013 but mostly the downs \u2013 grip the market. <\/p>\n

But I believe this volatility has the classic markings of a short-term, emotionally-driven correction, and in such situations historically it has been beneficial to remain calm and focused on the long-term. As the AAII also notes, instances of extreme investor pessimism have been followed by higher-than-median 6- and 12-month returns for the S&P 500. Going forward, I think patience will be rewarded once again. <\/p>\n","protected":false},"excerpt":{"rendered":"

Investors are getting increasingly edgy and bearish as stock market volatility continues apace, which is actually having the opposite effect […]<\/p>\n","protected":false},"author":3,"featured_media":4789,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-7319","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7319","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=7319"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7319\/revisions"}],"predecessor-version":[{"id":8877,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7319\/revisions\/8877"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=7319"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=7319"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=7319"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}