Yesterday, I told you about five big reasons the stock market could boom in 2023 and have one of its best years ever.
The list was pretty comprehensive. It included the following facts:
- Awful years for the stock market are always followed by awesome years.
- Falling inflation typically coincides with rising stock prices.
- Fed pauses systematically spark stock market rallies.
- Today’s valuation dynamic on stocks and bonds historically produces great returns.
- The economy will very likely avert a deep recession in 2023.
But frankly, it was just the tip of the iceberg. I truly mean it when I say there is a mountain of evidence suggesting record stock market gains are on the way.
So, today I’m going to share five more big reasons why the stock market will boom this year.
Let’s get right to it.
Why Stocks Will Boom #1: Sentiment Is Too Negative
One of the best contrarian indicators for the stock market is sentiment.
That is, stock market tops tend to be marked by “peak greed.” Bottoms, on the other hand, tend to be marked by “peak fear.” That’s why the world’s greatest investor – Warren Buffett – tells us to be greedy when others are fearful, and fearful when others are greedy. Always oppose consensus sentiment when that sentiment is at an extreme.
Today, consensus sentiment is at an extreme. It’s extremely bearish, implying max fear.
Perhaps the best gauge of this is the weekly sentiment survey from the American Association of Individual Investors. In 2022, that survey registered zero weeks of above-average bullish sentiment.
There wasn’t a single week in 2022 when the number of bulls outnumbered the bears in that survey.
That’s never happened before. The survey started in 1987. In those 32 years, the survey has never had a year when zero weeks had above-average bullish sentiment.
The previous lows were years with less than 10 weeks of above-average bullish sentiment. That happened in 1988, 1990, and 2016.
Next-year returns for each of those years were huge.
In 1989, the S&P 500 rose 27%. In 1991, the S&P 500 climbed 26%. And in 2017, the S&P 500 popped 19%.
The Buffett quote rings true! Historically speaking, it has paid off handsomely to be greedy when investors are as fearful as they are today.
We expect history to repeat in 2023. We’ve hit peak fear, which means record gains are on the horizon.
Why Stocks Will Boom #2: Positioning Is Too Bearish
Not only is sentiment super-fearful right now, but investor positioning is also super-bearish. And historically, that is a very powerful combination that tends to propel massive stock market returns.
Over in the options market, the CBOE Put/Call ratio has spiked to its highest level ever. That means investors are buying a lot of puts right now (bearish bets) and not a lot of calls (bullish bets). Options market positioning is as bearish as it has ever been.
Like extreme sentiment, extreme positioning is a reliable contrarian indicator.
Typically, when the CBOE Put/Call ratio spikes like it is today (to levels above 1), that spike is followed by big stock market returns. When such Put/Call ratio spikes are accompanied by big drops in investor sentiment to ultra-bearish levels (exactly what we have today), you almost always get big stock market rallies.
The only exception in modern history is 2008.
To that end, we believe the coupling of super-bearish investor sentiment and positioning that we’re seeing today means that unless a massive financial catastrophe is on the horizon, the stock market should soar over the next 12 months.
We see the odds of a massive financial catastrophe over the next 12 months as extremely low. Therefore, we see the odds of a big stock market breakout over the next 12 months as extremely high.
Why Stocks Will Boom #3: The Bullish 200-Day Crossover
While the mainstream media headlines are playing up this idea that stocks are in free-fall, that’s not entirely true. Stocks collapsed from January 2022 to June 2022. But since June, they’ve actually been mostly flat.
This six-month flattish price action is super-bullish. It has allowed stocks to “catch up” to their 200-day moving average (MA).
When stocks do that in a bear market, it almost always marks the end of the bear market.
That is, back in November, the S&P 500 closed above its 200-day MA for the first time in over six months.
Over the past 72 years, the stock market has done that only 14 different times. Thirteen of those times, stocks went on to soar over the next year. Average return: about 20%.
The only false positive of a bullish 200-day crossover was in the midst of the dot-com crash. At that time, valuations were significantly higher than they are today. Therefore, the comparison doesn’t hold much weight.
In other words, while the headlines out there are still scary, the price action in the stock market today is actually resembling the beginning of a new bull market.
You won’t want to miss what comes next…
Why Stocks Will Boom #4: Remember that Big 5% Rally Day?
Beyond the retaking of the 200-day MA, other recent price-action dynamics are typical of what you would see in the early innings of a new bull market.
One potent example: Back in November, after a light CPI inflation report, the S&P 500 popped more than 5% in a single day!
That’s an incredibly rare move. And historically speaking, it’s incredibly bullish.
Since 1970, the S&P 500 has rallied 5% in a single day while in a bear market on just 19 separate occasions.
In 18 of those 19 instances, stocks were higher a year later. The average return? 30%!
The only time stocks didn’t plow higher after a 5% single-day rally while in a bear market? Late September 2008, in the midst of the Lehman bankruptcy. And even then, stocks only dropped 9% over the next year. Go out 15 months, and stocks were up.
Said differently, stocks did something two months ago that they tend to only do when they’re about to explode higher over the next year.
There is 52 years of data to support that point.
That’s 52 years of data I wouldn’t want to argue against.
Why Stocks Will Boom #5: Too Many Stocks Are Showing Relative Strength
Another thing investors like to monitor for market health is something called “breadth” – or how individual stocks are acting.
When market breadth is good, that means a lot of individual stocks are advancing. And that’s typically very bullish. When market breadth is poor, that means a lot of individual stocks are retreating. And that’s typically very bearish.
Right now, market breadth is actually very healthy and supportive of big stock market returns in 2023.
That is, over the past few weeks, the percent of NYSE stocks trading above their 200-day MA has popped from historically low levels of below 15% to fairly healthy levels of above 40%. That’s an incredibly rare and incredibly bullish thrust in breadth.
The stock market has performed this exact same thrust only five times before, when the percent of stocks trading above their 200-day MA soared from less than 15% to above 40% in a matter of weeks.
Each time, stocks were higher a year later. And not by a little – by a lot. Average forward 12-month returns? Above 20%!
The Final Word
Where there’s crisis, there’s also opportunity. The stock market was hit with a major crisis in 2022. It has now created major opportunities in 2023.
Some investors will capitalize on these opportunities and become fabulously wealthy as a result. Others will sit on their hands and wait for the “coast to be clear” before investing. They’ll miss the shot at making small fortunes.
That’s why they say fortune favors the bold. In financial markets – as is true in life – risk and reward are tightly correlated.
Yes, there are lots of risks out there in the stock market right now. But there’s also huge potential rewards. Are you willing to take on a bit of risk for the chance to make fortunes in a massive stock market comeback?
If your answer is yes, click here.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.