Cheer Up and Buy Stocks!

Cheer Up and Buy Stocks!

By Lucas Downey, Contributing Editor, TradeSmith Daily

Here at TradeSmith, we’re not big on “feelings” when it comes to investing.

The research shows time and again that emotions only lead you astray.

If you want to make money, leave them at the door… And study the data and cold, hard facts.

This view has always steered me in the right direction. And especially right now, with the Mega Melt-Up looming large, it’s key to not let volatility grab hold of your emotions and shake you out of your plan.

But just because you shouldn’t fall prey to your own emotions doesn’t mean you can’t harness emotions whatsoever.

It turns out you can do some valuable analysis on the emotions of crowds… and the forecasts that lead from them.

I’m sure by now you’ve heard that investor sentiment fell like a rock last week.

The American Association of Individual Investors (AAII) Sentiment Survey has been polling investors since the late ‘80s about their market expectations over the next six months.

Just a few days ago, their sentiment readings reached an extreme bearish reading not seen since the last bear market… and before that, 2009.

The crowd is feeling gloomy about stocks. And I’m not surprised given the troubling situation with elevated economic uncertainty.

Maybe you’re like many of these respondents, feeling like the winds of negativity are blowing you away and taking away your sense of control.

To put it bluntly… You need to cheer up!

Because extreme bearish sentiment readings are actually a blessing in disguise.

And are a strong sign that the Mega Melt-Up we’re calling for here at TradeSmith has a long, long way to run.

Let me prove it to you…

Bear Market Sentiment in a Bull Market

The AAII has been collecting individual investor opinions about their market outlook since 1987.

The weekly survey gathers bullish, neutral, and bearish views.

What’s notable about last week is the bullish reading fell to 19.4%… And the bearish reading spiked to 60.6%.

I’ve charted all the bullish and bearish readings since 2007 below… with bulls in yellow and bears in white:

When I first saw this chart, it really blew me away…

This indicator reveals that respondents haven’t been this bearish since 2022… and before that, 2009!

It’s highly unusual… Especially since we’re in the middle of a young bull market that has delivered gains well above the long-run average.

And it naturally begs the question: What we should expect after such extreme pessimism?

Step 1: Cheer Up. Step 2…

Today we’re going to do two historical studies on the AAII survey.

Up first, let’s crack open the 60.6% bearish reading.

I went back and found six prior instances where the AAII bearish gauge was 60% or higher.

These handful of readings include late 1990, 2008, 2009, and late 2022. Most of you know those were trying times, to say the least.

But what you may not know is these were wonderful times to buy.

Whenever the bearish reading hits 60% or above, here’s how the S&P 500 performs afterward:

The data is clear… Don’t be fearful, be cheerful.

And you’ll note that these gains are well above the long-run average for the S&P 500. In fact, the 12-month return is about triple.

These are not bear market numbers, or even normal bull market numbers. These are melt-up numbers… and should reinforce everything TradeSmith CEO Keith Kaplan has been saying lately.

But let’s dive deeper… and look at the difference between the bullish and bearish sentiment.

Currently, when you take the bullish sentiment reading of 19.4% and subtract the bearish sentiment of 60.6%, you’re left with -41.2%. This is a great way to parse this data because it’s combining the two extremes into one reading.

I was able to find 10 prior readings where the spread fell below -40%.

If the first study didn’t excite you, this one will help.

When the AAII bull-bear spread dips below -40%, here’s how the S&P 500 performs afterward:

Let’s all say it together now.

Cheer up and buy stocks!

The crowd is rarely this fearful… That’s causing tons of anxiety, volatility, and noise.

As investors, we need to look through the noise and find the signal.

The latest market gyrations are yet another great opportunity to scoop up quality assets being sold by worried investors.

Don’t sit this one out. Utilize state-of-the-art software at TradeSmith to find the best names that’ll lead us out of the funk.

Understand that volatility is not a death knell to a Mega Melt-Up… but an expected feature.

We may keep seeing big stock swings. But you need to rein in those emotions and let the data show you the most likely outcome.

Take advantage of the fear out there…

And focus on the portfolio cheer!

Regards,

Lucas Downey
Contributing Editor, TradeSmith Daily

P.S. Our CEO, Keith Kaplan, just made the biggest prediction in the 20-year history of TradeSmith: That the next 12 months are going to get crazy… and deliver some of the biggest gains the markets have ever seen.

How does Keith know this? He and his team just introduced a new tech breakthrough, and it’s designed to do one thing: detect and model market melt-ups mathematically.

To come up with this breakthrough, they ran months’ worth of backtesting… crunched 5.2 billion data points… and examined more than 125 years of stock market data for the S&P 500, Nasdaq, and Dow.

Last week, Keith shared his prediction for the next 12 months during a special live event. (You can watch a replay of it by going here.)

He also demoed his new technology to show viewers the 10 companies poised to replace Nvidia as the hottest tech melt-up stock of 2025.

The replay will go offline soon, though. So if you haven’t watched it yet, you’ll want to do so right now before it’s too late.