Everyone wants to know where the stock market’s headed next. The answer is hidden in plain sight.
It has to do with sentiment. And it’s telling us that stocks are nearly certain to continue marching higher in the coming weeks.
Now, you may think of sentiment as “how the market feels.” But the truth of it is a lot more powerful.
Sentiment creates real pressure in the markets. And the more extreme it is, the more extreme the pressure.
If most investors are bearish, the market eventually runs out of sellers.
At that point, buying demand starts to exceed selling pressure, and prices rise.
It may sound simple. But it’s how markets work.
This fundamental relationship is exactly what we’re seeing in the market today.
Right now, investors are incredibly bearish… so bearish that the market is almost certain to go up.
Based on history, the market could climb another 18% from here. And the craziest part of it is… if you’re feeling bearish, it only reinforces this idea.
Let me explain…
Sentiment is more powerful than most realize. It tells us if buyers or sellers are controlling the market.
When there are more buyers than sellers, the sellers get to set the prices… And they demand higher prices. When the sellers are in the majority, the buyers get to do the price-setting.
Right now, there are more bears in the market than usual. It’s no surprise, given what has happened so far this year. But the massive negativity is actually a positive sign for the market.
One way to see it is from the American Association of Individual Investors (“AAII”), which surveys thousands of investors each week.
According to AAII, more than 50% of investors are bearish today. And bearish sentiment recently hit a high of 53%. This might not sound extreme, but it’s only the third time in history we’ve seen a level that high. Take a look…
AAII bearishness has only reached that level twice in the past decade. Both times were great buying opportunities.
The most recent was in April 2013. The S&P 500 went on to rally 17% over the next year… nearly double the average market performance of 7%.
Before that, we saw similar bearishness in July 2010. That led to an 18% gain over the next year… another staggering return for the broad market.
So, right now, you’re likely feeling terrible about the market. You’re not alone. Lots of folks feel the same way.
In fact, so many people are feeling bad, the market is running out of sellers. And prices are rising as a result. The S&P 500 is now up 28% from its March low.
We’re seeing firsthand how the market’s “feelings” translate into real-world results. And we shouldn’t expect it to stop now.
When everyone is bearish… eventually, they run out of shares to sell. When that happens, prices rise.
We’re seeing historic levels of bearishness today. And history says it could be setting up an 18% gain over the next year. The smart bet is to stay long.
Good investing,
Mark Putrino
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Source: Daily Wealth