[Charts] From Bearish Sentiment… to Bullish Stock Moves

It’s Friday in the Trend Trader Daily Nation.

So what, you say? Well, welcome! You must be a newbie.

Here’s the dealio...

Every Friday, I curate a handful of graphics to convey some important investment insights.

All it takes is a quick glance — and you’ll be up to speed and poised to profit. Especially today.

As I mentioned in yesterday’s column, today I’m sharing the single most reliable contrarian indicator I track.

As you’re about to see, it’s within spitting distance of flashing a screaming “buy” signal.

That might surprise you, considering that every major stock index keeps cratering. But the data (and the profit opportunity) couldn’t be more clear.

So let’s get to it before it’s too late…

So Few Bulls

As Humphrey B. Neill observed, "When everybody thinks alike, everyone is likely to be wrong."

And there’s no better proof of this than investor sentiment.

In fact, when the American Association of Individual Investors (AAII) bullish sentiment reading hits extreme lows, stocks don’t tank. They always rally.

What qualifies as an extreme low? Any reading below 20%.

And guess what? We’re only one percentage point away from that level.

Here’s the key: we’ll get the next sentiment reading on January 26th (you can access it here).

If it dips below 20%, it’s nothing but bullish for stocks. I say that confidently, based on the following undeniable data:

• Since 1987, bullish sentiment has dipped below 20% on 31 separate occasions.
• That’s more than enough occurrences to prevent anyone from trying to dismiss the findings as anomalies, or to ignore them because of a lack of frequency.
• And 31 out of 31 times, the S&P 500 Index has been higher six months later.

And not by a small amount, either — but instead by an average of 12.7%.

To put that average gain into perspective, the S&P 500 Index typically doesn’t return that much in a full year.

So when bullish sentiment really plummets, it represents an opportunity for us to essentially pick up a year’s worth of profits in half the time.

While that’s good news, the great news is that we can earn even more if we focus on small-cap stocks when this indicator dips below 20%.

Smaller is Even Better

Before the nitpickers in our midst try to dismiss this buy signal because the chart above shows the performance versus large-cap stocks, here’s the same chart, only this time versus the small-cap Russell 2000 Index.

As you can see, the trend is undeniable here, as well. When bullish sentiment retreats, small stocks soar in the ensuing months, too.

While this contrarian indicator isn’t 100% guaranteed with small-caps, it’s damn near close at 93.5%.

More specifically, small-caps have rallied 29 out of 31 times when bullish sentiment dips below 20%.

Most importantly, the average six-month gain checks-in a five full percentage points more than large-caps at 17.72%.

Bottom line: You’re not going to find a more accurate contrarian indicator in the market. So don’t ignore it. Instead, be quick to follow it, especially into today’s Trend Trader Pro “Trade of the Week.” As you’ll see, it allows us to potentially earn three times the historical average profit for small caps.

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Source: https://www.crowdability.com/article/charts-from-bearish-sentiment-to-bullish-stock-moves