Understand Where We Are and Where We're Headed

With just one trading day left, it was undeniable that stocks were likely to record their worst January since 2008. Last Friday afternoon's stunning reversal to the upside masked plenty of damage. All four major indexes were down big since Dec. 31, 2021 with the Nasdaq Composite and Russell 2000 off by about 12% year to date. NYSE declines swamped advances by 9.6 times two weeks ago and still outpaced winners by greater than 2 to 1 in the week ended Jan. 28. Clearly there was no joy in Mudville, Mighty Casey had struck out. As of Jan. 27 about 44% of all Nasdaq stocks were off by at least 50% from their highs. That has rarely been the case in the 21st Century. Many of the ones that were beaten up, though, had never made money. Those deserved to be knocked down big-time from absurd valuations. Here is how a representative group of some widely held stocks like that had fared versus the S&P 500 over the past 12 months. Betting on them now, even after huge selloffs, might still be a bad idea. Companies that continue to lose money become less valuable over time unless things suddenly make a 180-degree turn. Is there any good news to be seen? You bet there is. The AAII (American Association of Individual Investors) sentiment survey which was released on Thursday Jan. 27 showed one of the widest spreads between bullish and bearish members since 2013. Why is that good news? The public is almost always wrong on their market timing. Extreme bearishness is thus a very positive contrary indicator. Want proof of that? Here is that same time period's chart of the S&P 500. The last four times mom and pop investors became this gloomy were all followed by outstanding and long-lasting stock market rallies. Two other contrarian indicators are also concurring with that theory at present. Most individuals tend to be bullish. They typically love buying call options to make bullish bets on stocks rising. Put buying usually only becomes the thing to do following sharp selloffs. The chart below shows periods when the put to call ratio was quite elevated (circled in red). Each came after shares had been beaten up. Each preceded excellent upturns. The reading from Jan. 28 was the most extreme by far over the past 52 weeks. That suggests a major move to the upside is quite likely before long. Ditto for the Equity Mutual Fund Net Cash Flow chart shown below. Small investors tend to be buyers of stock mutual funds after sustained upturns. The data below show four-week moving average net purchases versus sales. After four straight weeks of declines, the balance swung from net weekly inflows averaging over $14 billion to net withdrawals of almost $3 billion. Remember, the little guy is almost always wrong. When they yank money out of equities you should be doing the opposite. While crappy money-losing firms deserved to go down there are plenty of very profitable, typically less than blue-chip names that offer incredible value right now. Here are just some of the stocks I've been actively adding to as prices plunged. I believe they are destined for great returns over the next six to 18 months. Most people think of making money when they sell stocks for more than they paid. In reality those profits were earned when you bought them cheaply, anticipating their future performance. Others will gladly sell at great prices only when they are scared. Don't waste the opportunity to accommodate them as you probably did back in March 2020 and during other periods of crisis.

Understand Where We Are and Where We're Headed

Remember, the little guy is almost always wrong. When they yank money out of equities you should be doing the opposite.

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