This Contrarian Indicator Strongly Suggests Stocks Could Surge 30%

You’ve probably heard Warren Buffett’s famous saying: “Be greedy when others are fearful.” Well, it’s safe to say a significant number of investors are feeling the heat right now. As evidenced by the latest data from the American Association of Individual Investors (AAII), approximately 60% of individual investors are experiencing bearish sentiment about the market. Historically speaking, this level of market fear has only been recorded in the past during extremely dubious economic periods.

Contextualizing Bearish Sentiment

The AAII has been conducting its survey since the late 1980s, and during that time, the measure of bearish investors has surpassed 60% a mere six times before now. The last times this occurred were in late 1990, twice during the 2008 financial crisis, and twice in 2022 when inflation was hot. Notably, these instances have correlated with significant market recoveries following prolonged downturns. But why is the current sentiment so negative?

We are witnessing the largest global trade conflict in almost a century, amid rising layoffs and crashing consumer sentiment. Last month alone, layoff announcements saw a staggering 245% increase, reaching a total of 172,017 job cuts—the highest we’ve seen since July 2020. Moreover, consumer sentiment fell by 9.8% from January, according to the University of Michigan’s survey. Combine this with projected U.S. GDP growth plummeting from +2.3% last quarter to -2.8% this quarter, and it’s no surprise that investors feel skittish.

Bearishness: A Historical Contrarian Indicator

However, history teaches us that when sentiment reaches these dreadful lows, it may be a prime time to adjust our investment strategies. Let’s examine the past instances when bearish sentiment surged above 60%:

• Late 1990: When bearishness hit over 60%, the stock market was on the verge of a downturn, yet within 12 months, S&P 500 gained over 20%.
• Late 2008 – Early 2009: A similar situation arose with another spike above 60%. Stocks fell around 30%, but then rebounded, soaring more than 60% within the next year.
• Late 2022: Investor fear registered above 60%, and stocks descended over 16% during the subsequent months, but rebounded approximately 20% after.

In fact, every time the AAII sentiment has dipped this far into bearish territory, it has indicated that stocks were nearing a market bottom and recovery was imminent. Historical data suggests that average forward 12-month returns hover around 30% after such bearish periods.

What This Means for Investors

Now, while these data points should give even the most skeptical investor pause, they certainly don’t guarantee that stocks are set to soar in the near future. Still, they underscore the importance of contrarian investing principles—following Buffett’s advice to adopt a greedy mindset when fear runs rampant in the market.

Currently, the S&P 500 is hovering around its critical support level: the 200-day moving average. Should we see a bounce from this level, it would serve as an extraordinarily robust buy signal for savvy investors. But where should one put their money as the market evolves?

Opportunities in AI Stocks

One sector that has demonstrated resilience and growth, even amidst economic uncertainty, is artificial intelligence. AI stocks have seen steady expansion over the past two years, making them a promising avenue for investment as the market stabilizes. A solid proxy for this booming industry is the Global X Artificial Intelligence and Technology ETF (AIQ), which has appreciated over 40% between March 2023 and now.

Final Thoughts

The current market environment may be fraught with challenges, but history reminds us that these gloomy forecasts may herald a turning point rather than an impending doom. For those willing to adopt a contrarian mindset, there are potentially lucrative opportunities on the horizon. As traditional conservative investors, let’s choose to be proactive, seizing opportunities while others sit on the sidelines, paralyzed by fear. It’s time to position ourselves for the recovery that history has shown is likely ahead.