Investors Are Scared… Is the Correction Over?
“The sky is falling. America, as we know it, is crashing. Thoughts of Armageddon are now mainstream. The world is ending… So let’s buy stocks.“
My friend Jeff Clark wrote that this week. Jeff is the best short-term trader I know. He typically trades options.
According to the S&A Digest newsletter, Jeff’s readers have recently booked gains of 80% in a day, 80% in a week, and 55% in a week.
#-ad_banner-#Right now, Jeff says the last two times we’ve seen these particular setup conditions in the stock market, the S&P 500 stock index has rallied 75 points in a few weeks.
I track different indicators than Jeff… but we often arrive at the same conclusion. Right now, I see that individual investors are scared. When that happens, you want to buy stocks.
My friend Jason Goepfert does the best job of anyone I know tracking investor sentiment. And he just wrote that individual investors “got shaken pretty hard by the latest string of down days.”
The “bull ratio” is based data from the American Association of Individual Investors. Individual investors have been so shaken that the “bull ratio” for is currently at one of the lowest levels of the last decade.
Recently, when it’s gotten this low, stocks have popped shortly after. Check it out…
According to Jason, when we see readings this low during bull markets, stocks have been higher three months later 87% of the time.
So Jeff Clark and Jason Goepfert think the correction is likely over based on the technical setup and the extreme of pessimism that we reached. They both think the market is going higher.
Meanwhile, stocks are relatively cheap now… For example, the forward price-to-earnings ratio of the Dow is 11.7. We haven’t seen levels this low since July 2009.
Combine low valuations with scared investors, and all were missing is the uptrend… But even without the uptrend, I’m putting my chips with Jeff and Jason.
Individual investors are scared… The correction is likely over.