“Widespread fear is your friend as an investor, because it serves up bargain purchases.”

~ Warren Buffett

Good Morning,

In the middle of all the ridiculous levels of chatter about what you should fear next, the roller-coaster ride of the last few weeks has been a doozy.   Most assuredly the experts cannot seem to agree on whether we should fear debt, the Fed, Omicron, Delta, China, Russia, interest rates or supply chains but they are nearly in complete agreement on this:

It’s the end of the world – again – and you are supposed to be terrified.

As any long-time reader knows, I cannot stand watching values dwindle in the near-term during required windows like this in markets.  I hate it more than you know.  But I have also learned this – when I feel this thing in my gut, I use it as my best contrary indicator.

Given so much rises and falls on the sentiment and psychology of the times, it is VITAL that we understand what is collectively unfolding around us – even as the generational demographic forces are surging across the board.

Value and upside surprises are born in the ugly pit of fear.

The Crowd Never Learns

Market gyrations back and forth over the same price ranges for weeks on end are enough to drive anyone to look for the extra large bottle of fruit-flavored TUMS – and about a gallon of bourbon – for sure.

On top of that – and in very short order – Tech has become a 4-letter word faster than you can spell TESLA.  We have often noted for you that one of the ugly underbelly secrets about tech is this:  the front-runners always get shot at first during setbacks.

The good news?

Plenty…in the terrible funk unfolding in the investor audience, sentiment is plummeting everywhere, even for the managers.

NAAI

 

The data above measure the amount of market equity exposure fund and institutional managers have in their accounts on a scale of 0 to 100.  As one can see, we now sit at levels rarely seen – and with the exception of a short window in May – there is only one window where it was lower:  The March Pandemic Panic Lows.

Shockingly, managers are now as fearful of the market as they were in late May of 2020 – just 5.5 weeks into the Pandemic.

Stunning.  Yet, for long-term investors, a very, very positive sign.

The problem?  Waiting and patience are not easy sometimes.

AAII In the Basement Too!

The latest AAII sentiment data fell again – also a good sign.  How good?

…read ’em and reap

 

The Bullish reading is now just 25% – hinting that 75% of the audience is now NOT bullish.

I want to give you a feel for how afraid that is based on history.

Back in March 2009, at the end of the Great Recession panic selling, the Bullish Sentiment reading was 19.7%, or just 5.5% lower than where we are now.  The future upside surprise value of a crowd that is this afraid?  Good question.

Better answer:  The DOW stood at just 6,700 at the end of that panic – or just under 30,000 DOW points ago.

Seen another way:  note that at the peak of selling pressure during the start of the pandemic shutdown last year, the average bullish sentiment reading for the five weeks of the most extreme selling in that panic was 33.90%   In other words, the massive number of headlines raging across the collective mind of the audience today has now made them MORE afraid than we were during the worst market period of the Pandemic onset – when complete darkness was upon us – and the DOW was just 18,950.

It Get’s Better Still..

 

So some may say – “Gosh Mike – that AAII data changes every week – so what?”  Good point.

So, let’s connect the dots and look again at the 8-week moving average to blend in all the changes.  That is the chart above – today’s latest data is showing a 35.17% bullish reading.  As you can see there are just a few other periods – over the last 5 years of “disasters” – which have seen lower readings.  The pandemic being the main one last year.

BUT – I bring your attention to the Point 1 on the chart instead.  The crowd is now more afraid than they were the month BEFORE the pandemic.

Just one word comes to mind:  Incredible.

Yes – but there is one more view that will help as you drink your eggnog and enjoy family and friends over the next few weeks

 

I thought this chart above would drive home the final stake in the heart of the dark fears navigating all our minds, during the quiet times, as headlines blare.

It is every single Bullish sentiment reading since mid-1987, spanning decades – with all the dots connected.   You will find through deeper research, that there have only been 28-30 other periods where the readings were collectively lower than they are today.

Can we go a bit lower?  Sure, of course – and we might well do so – for a bit.

But take a look at that massive string of data in the last chart.  Study it carefully as we stand in very rare territory.  VERY rare.  It has been said that, “the devil screams the loudest on the way out the door…”  The loud shrieks you are hearing from every headline, blaring from every rooftop, tend to mark the ends of things – not the beginning.

Notice in the chart above how few marks are below the red line – as compared to the data that is above the red line.  Let it sink in – feel the rage and fear in the crowd’s mind as depicted in the data – but do not react to it.

This is where contrarian muscles are flexed.

This is where storms test even the mightiest.

As you can see in the NAAIM data above, they too are folding.

This, my friend – this window, this period – is where wealth is built over time.  It is not during the weeks where we string together 8-12 in a row and all are up.  Instead it is all about what we do during the very toughest parts of the pathway.  The steepest parts of the climb, the heaviest weights on our backs.

This is where pathways become so critical as the only thing left is patience.

Gut Check

Sure it is tough.  And as promised in advance just weeks ago, there will be periods when that fancy tech world of stocks will make you want to puke – or worse, never hold them again.

One more thing about the multitude of fears being espoused and grabbing far too much attention.  Way back in 1982, when I started this crazy journey, the fears of the day looked something like this

 

Notice that today, they now look something like this

 

Notice anything?

Friends, we are reliving the forces of the 1980s and 1990s – only this time on steroids.  The same forces – only bigger – will drive very surprising results ahead – for the next couple decades at least.

Relax – this will pass.  Corrective waves create the future returns for the patient.

And remember this:  “It’s the strongest hearts, they say, that always survive.”

Have a wonderful Holiday Season and a very Merry Christmas with family and friends.

 

Until we see you again, may your journey be grand

and your legacy significant.