Investor’s sentiment AAII

“When the time comes to buy you won’t want to.“

Walter Deemer

Investors sentiment can be of great help when one is considering longer term investment. I use AAII Sentiment survey. A very simple analysis shows that when sentiment is very bearish stock usually perform better then expected. In last two weeks we have more Bulls than Bears and was the first time since 30th of December 2021. But what does that mean exactly, is that bullish or bearish?

Below I posted three charts showing historical reference of AAII sentiment survey with SPX.

1st chart depicts that we are in a period that is the most similar to 1990 and 2007/08 period. When the Bull-Bear spread reaches -30 % this is initially a very bearish signal, but it is also a signal that can result in very bullish outcomes, especially when we have a thrust in Bull-Bear spread and it reaches +10 %. And we just did that last week. Historically we had 10 such signals since 1987, 9 out of them were very bullish, only one failed in May 2008. I would say that odds favour the bulls in the next months.

2nd chart – we can draw a similar chart using smoothing 4 week average, which shows similar picture with two fail signals in 2008.

3rd chart shows 4 week smoothing average of Bulls since 1987. This one did not trigger yet, but as you can notice that sentiment among bulls was never this bad going back to 1988. You probably know what happened next.

Bull markets are born on worry; they are not a straight path up, draw downs and pullbacks can happen. There is a chance that we have reversal and bear market continues and we have to be prepared for that as well. Follow me for more market analysis.

Be patient and good luck.