After a strong year like 2019, investors should prepare for what could be the opposite in 2020 and it doesn’t seem they are

After nearly a -20% waterfall decline last October through December, in “An exhaustive analysis of the U.S. stock market” a year ago today I wrote:

“Someday in the future, stock investors will be giddy again and completely forget about how they feel right now.”

Sure enough, that’s what happened. Individual investors as gauged by the AAII Investor Sentiment Survey capitulated a year ago and have since then oscillated their enthusiasm for stocks sharply as a result of the stock price action. In the chart below we see the stock index with the bullish investor sentiment below it. Investor sentiment clearly oscillates up and down as investors swing from fear and greed, but right now they are bullish.

I also note the bullish sentiment evaporated during every market dip this year. The stock market has memory because its investors do so after such a fall a year ago investors were quick to react (emotionally at least) to every sign of another drop.

It looks like we’re ringing in the new year with high optimism in the stock market.

The Fear & Greed Index, which includes seven different investor sentiment indicators, is dialed up to the “Extreme Greed” level again as people are probably hopeful recent gainst will continue.

CNN FEAR GREED INDEX TRADING ASYMMETRIC

The last time this fear and greed gauge was this high was the end of 2017.

CNN FEAR GREED INDEX HISTORY BACKTESTED

The stock market has gained even more in 2019 than it did in 2017, but this year follows a waterfall decline.

After a strong year like 2019, I suggest investors prepare for what could be the opposite in the period ahead.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

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