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This contrarian indicator says the market is a screaming buy

Lawrence Lewitinn
Lawrence Lewitinn
Talking Numbers

Never mind the “smart money”; there may be a signal that stocks may break record highs, and it has to do with how bearish the least-sophisticated of all investors have become.

A measure of retail investor sentiment called the Daily Sentiment Index has dipped below 20, indicating the “average Joe” investor is quite negative on the markets.

And according to one technical analyst, that actually indicates that great news could be ahead for stocks.

“The most recent time that they were this least-bullish was back in mid-October,” said John Kosar, director of research at Asbury Research. “That was the last nice, tradable bottom we had in the Nasdaq 100.”

Since Oct. 16, the S&P 500 and the Nasdaq 100 are up 11 percent and 12 percent, respectively. Going back to 2010, every time the DSI dropped below 20, the market subsequently rallied.

“This particular group of investors, who tend to be wrong at the turns, are really negative,” Kosar said. “It tells you we probably are within a week or so of a significant bottom in a market.”

He is also encouraged by the market’s lack of direction over the past several months. “When the market goes sideways, it indicates that investors are trying to assimilate the recent gains,” said Kosar. “In this case, it would be gains since the Oct. 15low point. Usually once that’s done, we resume the trend that preceded the sideways action. So that’s another reason to think we’re ultimately going to break new highs.”

But Kosar is not ready to go all in on stocks just yet.

“I’m waiting for a couple of more pieces to fill in,” he said. “I want to see volatility get a little bit lower and stay there. I’m looking at some investor asset flows in some of the ETF. There is a couple of missing parts here. But I feel pretty confident in saying we’re within a few weeks of an important bottom.”

“We need to do a little more work there, but I think we’re close,” he added.