Its A Buy Sign For Stocks

Traders of stock index futures are now the most bearish on record. Its likely a good time to buy equities.

We know this because there are now more bearish bets by speculators on the S&P 500 E mini futures contracts than at any time since it began trading in 1998. That’s a quarter of a century ago.

Seems to forecast complete disaster

Its means those traders are “absolutely certain” that the broad market will drop like a stone, writes Adam Johnson, author of the Bullseye Brief financial newsletter.

“They [traders] are more negative now than during the housing crisis, the downgrading of US sovereign debt, the Greek bond default, and Covid,” he writes. “We survived all of those episodes and stocks went on to new highs, as I suspect will happen this time too.”

Contrary indicator

The massive bear position is often seen as a contrary indicator, meaning that when investors are extremely bullish or bearish then its probably best to bet the other way. in this case, the record-breaking bear position strongly suggests investors might want to pile into the SPDR S&P 500 exchange-traded fund which tracks the S&P 500 index.

Trading based on contrary indicators also makes some logical sense. When everyone who is bearish has sold there is no one, or hardly anyone, left to sell. Therefore its more likely that the market will rise over time.

Of course it works the other way as well. When everyone who is bullish has purchased shares then there likely wont be any more upside left, so its time to sell. We aren’t at that situation right now. We are at the other end of the spectrum.

Bears make it hard to buy

However, when there’s that much bearishness in the market and lots of political anxiety at home and abroad it is often hard for some investors to buy stocks when it seems like the rest of the world is selling.

That’s a normal reaction by most people. Everything that makes someone a decent human being also tend to work against them when it comes to investing. In simple terms, buying when everyone else is selling — which is what legendary investor Warren Buffet suggests — is like running towards the gun fire or entering a burning building. It goes against the instinct of most people.

And there why many investors tend to do the opposite of what is optimal. What wqe should all do is buy low and sell high. Unfortunately, many people buy when the market booms and then sell when it drops, which tend to be a recipe for losing money.