I am told during boot camp for the marines, there is the ever present option for participants to ring out, meaning they literally walk up to a bell, ring it, and pack their bags. Late last year, I had several updates talking about how market tops rarely have a bell ringing moment to indicate when THE top is in. They tend to be choppy, long, drawn out affairs. That is not so for bottoms when we hear “bells” very clearly. Mind you, I’m not calling this a firm bottom but it looks like it may be the beginnings of a bottom based on the extreme levels of sentiment registered yesterday. This update will be very brief and simply add some data to yesterday’s speculation that we were seeing a Washout of sorts.
Just The Facts
From the good work of Bespoke (love those guys) this am, here are the probabilities and averages for the market’s performance following a moment when sentiment hits an extreme. In this case, the measuring stick was the AAII survey of investor’s “bullishness” which hit a low yesterday of 17, truly extreme by modern standards. AAII represents an intelligent and focused group of DIY investors, mostly retirees subjectively. They pride themselves on not being part of the herd mentality and sentiment figures. While they are not the worst offenders as a group, the historical stats show that they are very much part of the herd, often buying high and selling at the lows. Bespoke did the homework on what happens to the S&P 500 following AAII “Bullish” readings below 20. Here’s the output looking at all periods post 1988.
S&P 500 Performance 1 month 3 months 6 months
Average 2.05% 6.51% 13.38%
Median 1.48% 5.37% 13.69%
% Positive 70% 92.6% 96.3%
In more recent history, mostly in the 2000’s, the numbers have not been quite as strong with a single outlier year (2008) in which we saw negative performance from each of the 1,3 and 6 month periods, but still very respectable.
You’ve heard me say in the past that investing is a game of probabilities. When the odds are in our favor, we need to step up, when they are not, we need to play defense. Given the numbers above, it seems the odds are now in our favor. Be very careful if you’re one of those DIY investors and please do not interpret this as an instruction to load up today. Our guidance suggests that the first quarter of 2016 is going to be tough – the whole thing. We plan to identify leadership, look for new uptrends and make very judicious purchases from now into the end of the quarter.
That’s it for this update; just some numbers to back up yesterday’s speculation.
Cheers
Sam Jones
