Good if You're Gloomy!

Are you feeling pessimistic about the market going forward? Well, if so, who could blame you? Stocks aren't cheap. The Fed threatens to raise interest rates 4 times this year. China's a mess, some say. Commodity prices are plunging and that says really bad things about the global economy, some say. It's an election year and the current cast of characters represent a nightmare of uncertainty, I say.

So, again, are you feeling gloomy? Well good! That's a positive signal for the market going forward. I know, crazy! But true. Read on:

The American Association of Individual Investors publishes the oft-quoted AAII Investor Sentiment Survey. Here's their description:

The AAII Investor Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of the AAII membership on a weekly basis. Only one vote per member is accepted in each weekly voting period.

The long-term averages are: Bullish 38.67%, Neutral 31.06%, Bearish 30.27%.

Here are the survey results for the week ending 1/13: Bullish 17.9%, Neutral 36.6%, Bearish 45.5%. Dang!

So, assuming you're gloomy, you're right there with the pack. 

According to Bespoke Investment Group, that 17.9% is the lowest weekly bullish reading since April 2005, and it's one of only 28 weekly occurrences---during the 29 year life of the survey---when bullishness read below 20%. Here's what happened during the one, three and six month periods following each occurrence:

One month: Positive returns 70.4% of the time. Average return for all periods: +2.05%

Three months: Positive returns 92.6% of the time. Average return for all periods: +6.51%

Six months: Positive returns 96.3% of the time. Average return for all periods: +13.38%

So how can it be that when the individual investor is most pessimistic about the market, that the market tends---the great majority of the time (historically speaking)---to deliver handsome returns shortly thereafter?

Well, think about it: At what point would you expect folks to have the least exposure to the stock market and, thus, the most exposure to cash; when 83% of them are bullish or when 83% are neutral to bearish? And at what point would you say the market has the greatest odds of moving measurably higher; when 83% of investors are already in the market (bullish), or when 83% are flush with cash? You got it; when everyone's sour on stocks, there's plenty of cash to pile in at the first sign of a bottom.

So, yep, if you're an individual investor, your market expectations should generally fly directly in the face of your mood. 

As for the moment; while yesterday and, especially, this morning, smelled (technically-speaking) bottomy, as I type oil's trading lower and U.S. stock index futures are trading right along with it (Dow future down 139 points). Which, per yesterday's presentation, is perfectly okay with me...