When investors get this scared, stocks rally

Traders work on the floor of the New York Stock Exchange.
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Traders work on the floor of the New York Stock Exchange.

A key indicator shows investors are running scared. However if history is a guide, this means the market is likely to post a strong rally ahead, according to an investment research firm.

"In other words, treasuries, which offer no upside from their face value, paid an investor less to own them than an asset class that has historically generated capital appreciation at an annualized high single-digit percentage rate. For this to happen, either investor expectations for long-term equity returns must have changed, or investors were really scared." — Bespoke Investment Group wrote in a note to clients Tuesday.

As of Monday's close the S&P 500 dividend yield was 2.38 percent, which was 0.63 percentage point higher than the 10-year U.S. Teasury note yield at 1.75 percent. This was the widest spread between the two instruments since July 2012, according to the firm.

S&P 500 dividend yield vs. 10 year Treasury spread

Source: Bespoke Investment Group

Bespoke ran the numbers and found when equities yielded more than Treasurys in the past to this degree, the long-term returns were significantly above average.

Here is the return data in such instances since 2008.

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