Every Thursday, the American Association of Individual Investors releases the results of Investor Sentiment Survey. It asks members about the prospects for stocks over the next six months, whether they’re bullish, bearish, or neutral. As with most sentiment surveys, these investors are most bullish at market peaks, most bearish at market bottoms. To them, rising prices mean falling risks, while falling prices mean rising risks.
This week there was a surprising drop in bullishness–and a corresponding increase in bearishness–among the members, as can be seen in the chart below. The top panel shows the percentage of respondents who said they were bullish, a mere 22%. That’s as low as the bears have been since the March bottom. In the past, such readings marked good times to buy the S & P 500, although, as can be seen, the readings didn’t always mark the bottom (witness 2008 readings), but a bottom.
We aren’t far from the percentage of bears seen at the March low (18.92%), but at that time a lot more of the survey participants had strapped on their bear costumes (70.3%).
The AAII survey has a few warts, so it’s not quite as rigorous as some surveys, InvestorsIntelligence’ surveys, for example (which still show high levels of optimism.) In addition, the association also surveys its members, but on a monthly basis as to how their assets are invested–sort of a what-do-you-think/what-are-you-doing comparison. At the end of October that suvey showed that investor cash levels to . . . uh . . . mid-2007 levels, so it will be interesting to see what their asset allocation is at the end of November.
For some reason, the action last week felt more disconcerting than the harder drop in July, and perhaps members were reflecting that. Because of their stellar track record as contrarians, however, their attitudes suggest that the market can (should?) head higher.
Jason, at sentimenTrader, says that waiting for a week before acting on similar setups has, in the past, produced an average return of +6.9% after three months, with 15 of 18 times positive.