Investors are funny old souls.
They’re like a slow-turning ship.
Once they get going in one direction, it’s a hard and long process to turn them around.
Maybe that’s not just investors. Maybe that’s people in general.
But anyway, here we just look at it from the investing side.
Because too often, the “slow-turning” investor can cause serious financial harm to their wealth.
Not just from losses, but from missed opportunities too.
We’ll explain what we mean below.
First, let’s check in on today’s market action…
Market Data
The S&P 500 closed down 0.1% to end the day at 4,924.97… the NASDAQ fell 0.8% to close at 15,509.90.
In commodities, West Texas Intermediate crude oil trades at $77.86, up 91 cents…
Gold is $2,054 per troy ounce, up $23…
And bitcoin is $43,553 up $417 since Friday.
Now, back to our story…
Could This Help You Time the Market?
We’ve often noted the weekly data from the American Association of Individual Investors (AAII) with interest.
Each week it publishes the Investor Sentiment Survey.
The AAII was established in 1978. And each week since July 1987, it surveys its members on their view of the market. It asks them if they are bullish, bearish, or neutral.
The timing of the first AAII survey is an interesting coincidence. It allows us to see what investor sentiment was like before the 1987 crash… and what it was like after the crash.
The 1987 crash happened quickly. Over just four days, the S&P 500 index fell more than 28%.
For comparison, the peak-to-trough fall of 33% in 2020 took more than a month. The peak-to-trough fall of 25% in 2022 took 10 months.
But back to that 1987 crash. What was investor sentiment like leading up to it?
Between late August and late September, investors were overwhelmingly more bullish than bearish. For the survey ending September 18, 1987, the number of bullish investors was 60%. Only 11% were bearish.
And still, through the rest of that October, the bulls averaged 40%.
But then a funny thing happened. As the market started to recover in 1988, one thing didn’t recover – investor bullishness.
Investors remained almost evenly split between bulls and bears – on average, around 25%.
Then, over the next 10 years, bullish sentiment increased. It reached 50% in November 1999… barely five months before the dot-com bubble began to burst in March 2000.
This is why the sentiment survey is often seen as a contrarian indicator. When investors feel most confident, it likely tells you (at least in the short term) that investors are too confident… and a market fall is on the way.
What it doesn’t do, however, is provide clues about the length or depth of any market fall.
For example, bullishness in July and December last year was at roughly the same level – 51%. So how did the market react each time?
After the July “bullish sentiment high,” the market fell 10% over the next three months.
After the December “bullish sentiment high,” the market fell 1.3%… before going on to hit a brand-new record high.
In short, it’s not an indicator you can reliably use to help you get out of the market before a crash.
Even so, it has some uses… as a way of helping with longer-term market timing for getting into stocks.
This is often one of the biggest concerns for investors… that the market has already started moving. So they’ll wait for it to fall.
Only sometimes, it doesn’t fall. Still, the investor holds out… until eventually, they can’t hold out any longer. That’s when the investor ends up getting into the market too late.
That at least partly explains the patterns you see with the Investor Sentiment survey.
It’s not often that bullish levels are low while the market is near a peak (looking at it with the benefit of hindsight).
So if you’re looking to allocate new capital to the market but you’re unsure of the timing, you could do worse than checking out the Investor Sentiment Survey. If historically, the bullish number looks low, that could be a time to buy.
As we mentioned at the top, investors are often like a slow-turning ship. It takes them a while to build up the confidence to get into position for the new market direction.
Often that can mean missing out on the market’s biggest gains… because they don’t know what to do. So anything that can help quicken that process (quicken that “turn”) is worth looking at.
(Note: Just one thing to bear in mind, the percentages can vary wildly week-to-week. But averaged over several weeks – a moving average, we guess – you’ll get an idea of the trend.)
It Will Never End
On the subject of bullish and bearish… and market tops and bottoms, we noted this news story from Bloomberg:
Black Swan author Nassim Nicholas Taleb said the U.S. deficit is swelling to a point that it would take a miracle to reverse the damage.
“So long as you have Congress extending the debt limit and doing deals because they’re afraid of the consequences of doing the right thing, that’s the political structure of the political system, eventually you’re going to have a debt spiral,” he said Monday night at an event for Universa Investments, the hedge fund firm he advises. “And a debt spiral is like a death spiral.”
We’re not saying he’s wrong. As the story mentions, Taleb warned about the potential for market crashes in 1987, 2008, and 2020.
But we’ll also note that since we’ve been in the financial publishing business (starting in 2005), we’ve seen, read, and even written many words about an impending debt crisis.
Back in 2005, U.S. national debt was $7.6 trillion. Today, it’s more than $34 trillion:
Over that time, we’ve realized there’s nothing we can do about it and nothing anyone will do about it.
The best solution is to be aware of it, assume it will continue to grow, and find the best investment solutions that can help protect yourself against it.
That’s why gold and Bitcoin are so popular. But don’t forget stocks too. As the national debt has increased 347% over the past 19 years, the S&P 500 has increased 307%.
Not a perfect match… but it’s better than cash. An item costing $1 in 2005 would now cost $1.61 today. That’s what too much government debt and money printing does for your money.
Teeka’s Next Big Event
Speaking of finding ways to get ahead in the market, here’s advanced notice of a subject we’ll cover further over the next week.
Investment expert Teeka Tiwari says that thanks to a phenomenon that has only happened five times since the 1980s, you’ll now have a chance to build wealth up to 500 times faster than the market.
And he says you can do it without investing in any extra-risky strategy. No cryptos. No penny stocks. No wildly speculative options trades.
Teeka calls it the “Retirement Shortcut”, and you can find out more about it here.
Report Card Reminder
Just a reminder, last Friday we published part one of the first-ever Legacy Research Annual Report Card.
We reviewed the seven entry-level publications we help publish. Grades ranged from an A+ to a D.
To find out which service got what, go here.
Signed and Sealed
We managed to get a copy of the contract signed by our new trading expert:
Naturally, we’ve had to redact certain details. But we hope to reveal everything as soon as next week.
So stay tuned for more.
More Markets
Today’s top gaining ETFs…
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Invesco Energy Exploration & Production ETF (PXE) +2.3%
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iShares U.S. Oil & Gas Exploration & Production ETF (IEO) +2.1%
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First Trust Nasdaq Oil & Gas ETF (FTXN) +1.4%
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Financial Select Sector SPDR Fund (XLF) +1.3%
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iShares U.S. Financial Services ETF (IYG) +1.2%
Today’s biggest losing ETFs…
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Invesco China Technology ETF (CQQQ) -3.5%
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KraneShares MSCI All China Health Care Index ETF (KURE) -2.8%
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SPDR S&P Semiconductor ETF (XSD) -2.5%
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Global X Lithium & Battery Tech ETF (LIT) -2.2%
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VanEck ChiNext ETF (CNXT) -2.2%
Mailbag
If you have any questions or comments for our experts here at Legacy Research, we’d love to hear from you.
Write to us at [email protected] and just type “Daily Cut mailbag” in the subject line.
Cheers,
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Kris Sayce
Editor, The Daily Cut