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AAM Viewpoints – Spiking Investor Fear May Indicate a Buying Opportunity

Every time someone asks for our equity market projection we always include the obvious: a correction can occur at any time. Corrections are normal, needed and provide structure for markets to move higher over the long term. The current equity market correction is no different. During a correction, the mood of investors moves from greed to fear.

Contrarian market sentiment indicators can help to target cyclical tops and bottoms of markets rather accurately. Identifying these extremes in emotion can help investors who would like to add to their holdings but don’t want to do so at near-term tops. Spikes in greed tend to correlate with cyclical tops and spikes in fear tend to accompany cyclical bottoms.

fear and greed

Source: CNN

At this point we believe the market is very close to a crescendo of investor fear. The chart above is the CNN Fear and Greed Index, which is a great tool to measure changes in investor emotion. As can be seen, the index is currently at 7 which indicates extreme investor fear. Because this indicator is contrarian, a crescendo of fear would tend to be correlated with a near-term market bottom. In short, this is likely a very good entry point for adding to one’s equity holdings, in our opinion.

 fear and greed over time

Source: CNN

We do not profess to try to call the top or bottom of any market as we believe that is a fool’s game. We believe that being fully invested on an ongoing basis is the best strategy for long-term investors. Market timing rarely has any long-term value. After having said this, we have clearly sunken firmly into the “buy” zone with the indicator sinking from over 40 back to 7.

Some might argue this is a secular top to this market, however, that would be hard to believe as our outlook for corporate earnings is very bullish. Stock prices tend to follow earnings and earnings are headed up. Could there be headwinds? Sure there could. Trade barriers could slow the rate of growth. The Fed could restrict growth by raising interest rates too quickly. We don’t see those current threats as enough to derail a global expansion.

As corrections go, this one is textbook. It is complete with a huge dose of investor fear and anxiety that has risen to a level that would tell us that the correction is likely almost over and higher prices are ahead.

 

CRN: 2018-0305-6470 R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.

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Effective, June 10, 2016, please note that Gene Peroni left Advisors Asset Management (AAM) to become President of Peroni Portfolio Advisors, Inc. Peroni Portfolio Advisors, Inc. ("PPA") is an investment advisor independent of AAM.