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Published: August 27, 2010
For years, market strategists have tried to explain that
investor bullishness is bad for future stock returns, and when
investors are very bearish, it's a great time to buy. They're
right. I've gone over 25 years of data compiled by the American
Association of Individual Investors (AAII), and found this
investing maxim to be remarkably accurate. And guess what? The
AAII's weekly survey has just revealed another low in investor
sentiment.
First, let's take a look at what happened in the late 1980s when
investors had just come out of a sharp market crash (the
infamous
Black Friday of October, 1987) and sentiment was fairly
bearish. This table shows the annual low point for investor
sentiment from 1987 through 1993 and how the market subsequently
fared. Throughout this period, investors were very bearish, and
less than one in five investors considered themselves to be
bullish. Those lonely bulls sure made some money, though.
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If you bought stocks at the annual low point in terms of
investor sentiment, your three-year return would have been at
least +37% in every one of those years, or roughly +11% on an
annualized basis. In some of those periods, annualized returns
approached +15%.
In the ensuing years, investor sentiment was never again so
bearish (expect for a quick dip in 2003 and 2005). But by 2008,
the AAII survey was once again showing bulls to be a lonely
group. Investors that chose to wade in while sentiment was very
bearish in 2008 surely got burned, as the markets absolutely
cratered in subsequent months. So this approach is not
foolproof.
But more recently, the strategy has once again been paying off.
Fully 70% of investors were bearish at the beginning of March,
2009. Yet, one year later, the S&P 500 was more than +60%
higher. Last November, when the bears were once again on the
prowl, gutsy investors would have made a decent +6% gain in the
next six months.
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This brings us to the latest AAII reading, which shows that
bulls are again becoming a lonely crowd, with only one in five
investors citing optimism. That's partially due to a series of
weak recent economic reports, but it's also due to the fact that
the S&P 500 is on track for its third straight losing week and
has fallen -14% since early May. That's the main takeaway of
this analysis. Investors tend to turn bearish after the market
has posted weak returns.
Action to Take --> In times
of heightened bearishness, it's important to separate companies
that are truly heading into tough times from companies that are
operating at a steady pace but are simply unloved because
investors are selling stocks. The latter group is what you want
to focus on when making a watch list of stocks to buy.
As a short list of companies that I believe will continue to
post decent results, yet are now well off of their highs, you
can take a look at:
- Best Buy (NYSE: BBY)
- Charles Schwab (Nasdaq: SCHW)
- American Superconductor (Nasdaq: AMSC)
- The New York Times Co. (NYSE: NYT)
- Ford Motor (NYSE: F)
If the market begins to strengthen, these names will likely
see fresh buying interest.
-- David Sterman
Staff Writer
StreetAuthority |
