Moments of extreme bearishness are often moments of opportunities

Right now, the herd of investors is selling and heading toward the exits. Mainstream financial media is encouraging investors to get out of stocks.

At the end of April, the American Association of Individual Investors (AAII) Sentiment Survey showed that an astounding 59% of investors were bearish. This was a new one-year high for investor pessimism. That’s significantly above the long-term average of 30.5%. Combine that with a reading of 11 on CNN’s Fear & Greed Index this weekend and you have a wildly prevalent negative outlook on stocks.

But moments of extremes like this are often moments of opportunity. When the majority of investors see nothing but doom in their future, that’s historically been one of the clearest moneymaking signals. So may be it is time to “be greedy when others are fearful”. Extreme pessimism (or euphoria) is a contrarian indicator. Time and time again, this level of negativity has been a buy signal.

Don’t panic as everyone else does. When sentiment dips into extreme territory, it’s time to start looking for the best discount stocks available. You should have a wish list ready of all the companies you want to own a piece of that are now available at a big discount. In the long term you can’t go wrong with this.

Historically, when optimism is low, like it is now, the median gain of the S&P over the next 26 weeks is 7.1%. And over the next year, the S&P has posted a median gain of 17.9%. Now is not the time to move to the side-lines. This is usually a time to realize that there are new opportunities at heavily discounted prices. I bet history repeats itself again. Don’t sit on the fence, bit start to act.

Sven Franssen