On Wednesday, August 13, the S&P 500 closed at a new all-time high. So did the Nasdaq-100.
That very same day, the American Association of Individual Investors (AAII) released its latest survey results, as it usually does on Wednesdays.
To my surprise, there are somehow more individual investors who are bearish over the next six months than there are bulls. By a lot.
And this is now the second week in a row where that’s the case.
The Data
It’s remarkable how much a stock market that’s making new all-time highs scares the general public.
Here’s the latest sentiment data, compared to recent past, published directly by the AAII:
We like it around here when everybody gets it wrong. That provides opportunities for the rest of us who are paying attention.
If you’ve been reading this newsletter over the past four months, you’ve watched us benefit from this kind of mispositioning in real time.
You see, if the S&P 500 and the Nasdaq-100 are both making new all-time highs, and everyone is bullish, there comes a point where they’re just won’t be any more bulls left to buy stocks.
And that’s when prices start to fall.
But we have the opposite scenario.
The S&P 500 and the Nasdaq-100 are making new all-time highs, but there are still somehow more bears than bulls.
That’s something we haven’t seen since that May – June period, and it’s evidence to me that this market still has more upside.
Ignoring Seasonal Trends
August is historically one of the worst months for U.S. stocks, particularly during post-election years.
We discussed how we use seasonality to help us make decisions in the market two weeks ago.
The bottom line is, we don’t want to position ourselves for a favorable period in the market, or an unfavorable one, beforehand.
We want to look back after the fact to see if the market is responding to seasonal tendencies – or more importantly, if the market is ignoring them.
In other words, if the market is supposed to be strong during a specific period, and instead it’s weak, there are probably larger underlying forces holding back the market. And that weakness is likely to persist.
The opposite is also true: When stocks do well during what is historically a weak period for stocks, that’s the signal.
Well, this month is historically a bad time for stocks. Let’s check in and see how they’re doing…
Just in August, the S&P 500 is already up more than 2%. The Nasdaq-100 is up more than 2.5%. And the small-cap Russell 2000 is up more than 4%.
To me, the market is ignoring seasonal weakness.
Everybody is wrong again.
I can’t believe it…
Stay sharp,
JC Parets, CMT
Founder, TrendLabs