After a massive two-month rally, stocks took another dive…

The S&P 500 Index fell nearly 10% from its August peak to last week’s low. We’ve seen more volatility from there. And now, the big question is whether the market will break below its June low.

That’s unlikely to happen, as I explained recently. In fact, there’s good reason to expect a big rally over the next year.

You see, futures traders recently hit extreme levels of bearishness. We’ve only seen a few similar setups since 2010. But the returns that followed were spectacular. And it’s one more sign that a major buying opportunity is near.

Let me explain…

Not all sentiment setups are created equal.

Lots of data is “noisy.” It will flash extreme signals too often to be of use. Instead, the best sentiment setups are the ones that rarely trigger… but have a near-perfect track record of success.

What I’m sharing today is a perfect example of just that. It comes from the futures market. And it has only triggered three other times since 2010.

Specifically, we’re looking at the Commitment of Traders (“COT”) report for the overall market. Longtime readers know the COT is a weekly report on what futures traders are doing with their money. When traders pile in on one side of a trade, the opposite tends to happen.

At each bearish COT setup since 2010, stocks have been darn close to their ultimate bottom. And they’re coming off incredibly bearish levels right now. Take a look…

We’ve had two bear markets and two close calls in the past 12 years. And the COT hit a similar negative reading in each case before stocks turned higher.

Specifically, this reading recently fell below and rose back above the negative 250,000 level. You can probably guess that folks who bought after cases like these did well. But the extraordinary outperformance might still surprise you…

Stocks have been on a tear since 2010, returning 11.5% per year. Buying after setups like this one crushes the typical buy-and-hold strategy, though…

Similar instances led to 6.7% gains in three months, 14.1% gains in six months, and an impressive 25.8% gain over the next year. Again, these are fantastic returns.

The one concern is that our sample size is small. However, that’s also a good sign. Remember, the best sentiment triggers are rare… But when they say “buy,” they’re right.

This doesn’t mean stocks can’t fall further in the coming weeks. But the smart bet is on much higher prices over the next year.

So if you’re a long-term investor, get ready. The pain of 2022 could soon turn into good times once again. And it’ll likely look like 20%-plus gains over the next year.

Good investing,

Brett Eversole

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Source: Daily Wealth