"The Stock Market Selloff Looks Scary. Watch This Sign for the Time to Buy."

The stock market has been on a wild ride lately, with the S&P 500 experiencing its worst day of 2025 and the second-worst March trading day ever. The bearish investor sentiment, as measured by the American Association of Individual Investors (AAII), reached a high of 60.6% just before this selloff. This level of pessimism is historically significant, as it is the highest in 30 months since September 2022 and the third-highest reading over the last 10 years. But is this a sign to panic or an opportunity to buy?



Historically, periods of high bearish sentiment have often been followed by strong market recoveries. Ryan Detrick, the chief market strategist at Carson Research, noted that on average, stocks have risen approximately 28% in the year following periods when bearish sentiment exceeded 60%. Expanding the analysis to include all instances where bearish sentiment surpassed 55% in the AAII survey, he found consistently strong returns over the subsequent year. For example, "the S&P 500 was up a median of nearly 13% six months later and 18% a year later," Detrick stated.

However, it's important to note that exceptions exist. The spike in fear observed in early 2008, which was followed by significantly lower returns a year later, serves as a cautionary tale. This suggests that while historical data points to potential gains, investors should be mindful of the current economic environment and avoid assuming that past performance will always repeat.



The recent market volatility has been driven by several key factors. Weak housing data and softening consumer sentiment have been cited as possible catalysts for the downturn. The S&P 500 (VOO) fell 4.16% over the past week, bringing year-to-date (YTD) returns just below break-even at -0.16%. The decline was led by consumer cyclical stocks, including Tesla (TSLA) and Amazon (AMZN), both down more than 5%, dragging sector heavyweights like Ford (F) and Disney (DIS) along with them.

Despite the lack of meaningful movement in Treasury yields or interest-rate expectations, the downturn appears more sentiment-driven than fundamentally driven. The market action suggests a shift away from high-priced growth stocks toward undervalued opportunities. This rotation, if it persists, may turn overall index returns negative in the near term, as seen with the Russell 2000 shedding 4.48% this week. Small Value stocks (IJR, -4.4% YTD) underperformed Small Growth stocks (IJT, -3.15% YTD), narrowing the valuation gap.

In contrast, international markets have shown relative resilience. Developed markets (EFA) declined modestly by -0.78%, and emerging markets (VWO) fell by -2.50% for the week. Despite these declines, both developed and emerging markets remain positive YTD, with developed markets up 7.67% and emerging markets up 2.86%. Notably, some previously underperforming markets are staging impressive comebacks. For instance, China has seen a +16.1% YTD return, Germany is up +11.9% YTD, and the UK has a +5.7% YTD return. These rebounds highlight a key lesson: Market performance is often disconnected from political narratives.

So, what should investors do in this environment? The historical data on bearish sentiment suggests that there could be a contrarian buying opportunity. However, the current market volatility and the shift away from high-priced growth stocks indicate that investors may be seeking undervalued opportunities, which could lead to a rotation in the market. This rotation, if it persists, may turn overall index returns negative in the near term.

In summary, the recent market volatility is driven by bearish investor sentiment, weak housing data, and softening consumer sentiment. These factors suggest a potential for a market recovery in the near future, but the shift away from high-priced growth stocks and the rotation in the market may lead to near-term volatility. Investors should stay flexible, avoid knee-jerk reactions, and continue seeking opportunities in undervalued areas of the market.