Stocks Bounce Usually After A Decline Like This

Stocks Bounce - Time To Buy Stocks

Sentiment on stocks has shifted so quickly the S&P 500 went from being overbought to oversold in a few trading days. The CNN Fear and Greed index bottomed at 6 out of 100, which signals extreme fear.

That doesn’t mean stocks will increase over the next 12 months. It means stocks likely won’t crash further in the next month without a major fundamental catalyst.

It’s important to remember that these corrections occur often and are usually buying opportunities. For most of this bull market, the moniker has been to buy the dip.

However, in 2017 and the summer of 2018, there weren’t any dips. Investors got complacent. They paid the price either by getting too long stocks in late September or panicking after the 5% decline in early October.

A famous investment saying is money flows from impatient to patient investors. You can’t let returns manipulate your emotions because that will cause you to make big mistakes.

It’s usually a good time to sell when investors are euphoric. Personally, when I find myself bragging about returns, I know my portfolio is about to take a big hit.

As of October 11th, it’s time to buy U.S. stocks because investors are in a panic mode. As of October 10th, the NAAIM exposure index fell over 30 points to 52.86 which is the lowest level since May 2016.

Excessive pessimism in this index is below 30. The chart below shows the NDR daily trading sentiment composite. As you can see, it has fallen to 36.67 which is the lowest level since early April.

Since 1994, a reading below 41.4 is consistent with 31.79% annual gains. If you just look at the data since 2016, the returns are 28.67%. Near-term returns are best when there’s fear in the market.

In bear markets, fear is met with sharp rallies which disappear quickly. In bull markets, these selloffs are met with small rallies that build for weeks.

(Click on image to enlarge)

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