Fuel to the Bull Market’s Fire

February 28, 2025

Fuel to the Bull Market’s Fire

By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

Why so bearish?
The AAII Sentiment Survey track record is spotty…
Why we’re taking the other side of the trade…
And betting on a Mega Melt-Up…
The VIX shows a buy signal…

I couldn’t believe what I was seeing…

The American Institution of Individual Investors (AAII) Sentiment Survey is usually a solid read on where investors’ heads are at.

(Not that you’d want to follow where investors’ heads are at – most times, you want to run the opposite direction. But we’ll get to that.)

There’s no better way to describe this week’s reading other than absurd.

But let me paint you the backdrop before we put the subject into focus.

The S&P 500 and Nasdaq both posted new highs just last week. And they did this…

One month into a second presidential administration that was previously very good for capital markets… is currently focused on deregulation, government efficiency, and tax cuts… and just passed its first major budget bill.
With the 10-year Treasury yield down 11% from the local high on Jan. 15.
While 75% of reporting companies in the S&P 500 beat estimates this earnings season.
And a week before data showed the U.S. economy grew 2.3% in the last quarter.

You don’t even need to talk about the productivity boost coming from AI, and the earnings reports from Nvidia (NVDA) and Snowflake (SNOW) showing that the AI trade is still in full swing.

OK…

When you look at all this on its own, you’d expect investors should feel pretty bullish, right?

Instead, when the AAII survey asked: “What direction do you feel the stock market will be in the next six months?”…

Almost 61% of those surveyed think stocks will be lower in six months, and just 19.4% think stocks will be higher.

The survey result was so bearish, it cracks the top 10 most bearish results of all time…

No, seriously. There we are in yellow:

Should we care?

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Let’s check the bears’ track record…

Let’s take a look back at the S&P 500 index for all the dates above, starting in 1990. In my charts, I’ll mark each one with a vertical blue line and draw a horizontal line highlighting the price action of the next six months. As you can see above, they come in clusters.

Bearish sentiment sat at 61% on Aug. 31, 1990. Six months (or 180 calendar days) later, stocks were up 13.7%.

Then it hit 67%, the second highest bearish reading ever… on Oct. 19 of that same year. Six months later, stocks were up 25.6%:

In fact, these two signals were at the beginning of what would become a long and strong bull market lasting the entirety of the ‘90s.

Not the best track record for the bears so far. But let’s skip ahead to 2008 – surely they must have been on the money there.

The next two bear readings, on March 13 and Oct. 9, were pretty accurate. The first was a few days before Bear Stearns blew up, though that didn’t directly cause the market to crash, and instead it saw a short-term rally. Six months later, though, stocks were down 7.1%.

And the second was a month after the Lehman Brothers collapse, which preceded a six-month slide of 12.16% in the S&P 500.

But just look at that third signal:

On March 5, 2009, bearish sentiment in stocks hit an all-time high, with 70.2% of respondents saying stock prices would be lower. That was the day before the bear market low of the S&P 500 of about 667.

What followed was one of the biggest bull markets of all time.

Finally, let’s look at 2022.

Investors got it right to be bearish in late April, as inflation became the biggest focal point in markets. Stocks dropped -10.3% six months later.

In June, another signal saw stocks unchanged six months later. And in September, two nearby signals flashed just weeks before the bear market bottom, with stocks recovering 6.8% and 9.3%, respectively, six months later:

What does all this tell us?

5 out of the last 9 times that investors responded to the AAII survey with extreme bearishness on the six-month direction of stocks… Stocks were higher six months later. One of those times, stocks were flat.

And the three times they were right, it’s not too hard to see why. Stocks were already well off their highs, and major market mishaps like the Great Financial Crisis and inflation were controlling the narrative.

Once again, that’s not what we’re seeing today…

We’re in a bull market. It’s also a young bull market – only two years – which don’t tend to end after such short runs.

And as far as I can see, the only wild card in play is President Donald Trump’s tariffs. These could be significant… But every other part of the economy and markets are firing on all cylinders

And then we have the grandaddy factor of them all… AI.

Companies are piling into the idea of AI, and investors are rewarding anyone that does. That’s because AI has the greatest potential for profit margin expansion and productivity of any technology since the internet… and before that, electricity.

I mean, c’mon: Even in the earnings report that had NVDA selling off Thursday, we learned that “the fastest product ramp in our company’s history, unprecedented in its speed and scale” – which was the new AI superchip, Blackwell – rewarded Nvidia with another $11 billion of revenue. That’s just in one quarter.

So, sure, NVDA didn’t soar right out of the gate.

But if you want a true reading on the health of NVDA and 10 other stocks right now, don’t miss the replay of TradeSmith CEO Keith Kaplan’s free Last Melt-Up briefing.

Because NVDA is one of the stocks that could soon be riding an ultra-rare market pattern. One that has only appeared twice before – going back 125 years.

And with our brand-new Snapback strategy, we can take advantage of Wall Street’s “sell first, ask questions later” attitude and ride those stocks into what’s setting up to be quite a dramatic recovery.

I should mention, the Snapback strategy just saw a ton of action. There are 17 signals live right now, all triggered in the recent volatility.

That doesn’t happen often. In fact, the last time we saw this much activity in Snapback was during the pandemic crash…

Back then, outsized bearishness and investors piling into shorts wound up becoming part of the fuel that spurred the market back to life.

And with our other new innovation, the Melt-Up Quotient algorithm, we can be certain of when a melt-up has begun, and when it’s likely met its end.

Click here to watch Keith’s historic reveal of where markets are truly headed over the next 12 months.

If you needed one more thing to convince you, look at this…

My good friend and colleague Jeff Clark has been watching the chart of the CBOE Volatility Index (VIX) like a hawk.

You see, years ago Jeff observed a unique market buy signal on the VIX. I’ll let the man himself do the talking, as he did just recently in his free e-letter, Market Minute…

The Volatility Index (VIX) is about to generate its first “buy” signal of 2025.

The VIX gave us eight buy signals in 2024. All of them came within a day or two of at least a short-term low in the stock market. And all of them were good for a rally of at least 100 points in the S&P 500.

So, while it has been a tough time for the bulls over the past few days, they can look forward to some positive action once the VIX generates a buy signal – which could happen as soon as today.

Look at this chart…

VIX buy signals occur when the index closes above its upper Bollinger Band and then closes back inside the bands.

Bollinger Bands indicate the most probable trading range for a stock or an index. Whenever a chart moves outside of its Bollinger Bands, it signals an “extreme” condition – which is vulnerable to a reversal in the other direction.

I’ve created my own chart of the VIX with its Bollinger Bands… along with the S&P 500. Do you see what I see?

Every time the VIX jumped above its upper Bollinger Band and then closed below, stocks set a short-term bottom.

I’m willing to bet that’s exactly what’s happening today, as well.

Especially since we’re still very much in the midst of an epic stock melt-up.

It’s kind of like how, in 1995, investors probably thought Microsoft (MSFT) was finished with its ascent. The Federal Reserve had pushed interest rates all the way up to 6%, the cutting cycle was going painfully slowly, and besides, MSFT was already up 529% since 1990.

Instead, MSFT went vertical… after forming what we now at TradeSmith call our Mega Melt-Up pattern.

To hear why Keith believes that this could be a historic year for stocks – while it lasts – and get his top 10 melt-up stocks, watch his free demo here.

To your health and wealth,

Michael Salvatore signature