We’re leaving the bear market in the dust…

The bottom happened nine months ago. Stocks have surged higher since then… And we’re darn close to new all-time highs.

Few would have thought it was possible at the start of the year. Investors wanted nothing to do with stocks. Now, with prices moving higher, folks are getting excited again…

Mom-and-pop investors are now the most optimistic they’ve been since before the bear market. And one bullish reading just hit a new 52-week high as a result.

That might look like a typical warning signal to contrarians like us. But as we’ll see, this surge doesn’t doom the market. In fact, sentiment can get a lot crazier before we need to start worrying.

Let me explain…

It has been a heck of a rally. Stocks are up more than 10% in four months. And now, the average investor is finally starting to notice.

We can see it by looking at the American Association of Individual Investors (“AAII”) survey. This is a simple yet effective tool for getting a handle on how folks feel about the market…

This weekly poll asks individual investors whether they’re bullish, bearish, or neutral on the stock market for the next six months. And it has been collecting that data for more than 30 years.

That long history means we can see how sentiment changes throughout market cycles. And with stocks moving higher, folks are getting more bullish today.

Specifically, the bullish reading from the AAII survey hit a 52-week high last month. You can see it in the chart below…

This spike in sentiment stems from the massive rally we’ve seen in stocks. Only about 19% of folks said they were bullish in mid-March. That figure has jumped to more than 45% in recent weeks.

The biggest gains usually happen in hated assets… So you might assume this change would be bad for stocks going forward. But history shows that’s not the case.

To see it, I looked at each new 52-week high in the bullish rating. Here’s what stocks did after similar setups in the past…

The S&P 500 Index has increased 7.7% per year since 1990. We’d typically expect worse performance after folks get bullish. But not this time.

After the AAII bullish reading hit a new 52-week high, returns increased to 5.9% in six months and 9.7% gains in a year. That’s not massive outperformance. But it proves a larger point…

“Mom and pop” have started paying attention to the boom in stocks. At the same time, we’re still a long way from the kind of excitement we’d expect at a market top.

Just take another look at the AAII chart to see it. This measure surged all the way to 57% in April 2021 – a few months before the market peaked. And it stayed above 40% for much of the year.

In other words, it isn’t time yet to bet against stocks. Sentiment still has plenty of room to run. So despite the ramp-up in optimism, we want to stay bullish today.

Good investing,

Brett Eversole

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Source: Daily Wealth