Individual Investors Are Not Buying It
Click to enlarge


Lots of people have been discussing how negative investor sentiment is, showing the chart above. It shows markets making new all time highs as expectations that markets will be higher six months hence is at a mere 19% of AAII respondents. (See Individual Investors Are An Emotional Wreck And It Is Astonishingly Bullish, Investors are Liars, and AAII: Cash Allocations at a 16-Month High).

Jason Goepfert at Sentiment Trader notes that “Individual Investors Are Not Buying It.”

“If the numbers stand, then we’re seeing a remarkable exit from public markets among individuals . . . The latest weekly survey of expectations for the stock market showed that only 19% of respondents expected the market to head higher over the next six months. That’s the lowest reading since near the bottom of the bear market in 2009.

Investors’ skepticism in the face of new highs proved to be a decent sign going forward, especially in the shorter-term of 1-2 weeks. That’s when the S&P’s out-performance after any other 3-month high was the greatest. After that, it evened out and fell more in line with a random return.”

Let’s put this into a more quantitative context than the pure, “too bearish” framework.

In the table above, Jason put the too bearish meme into the richer context of what occurred in the past when markets hit 3 month high (as they have been doing) and at the same time saw sentiment all to 3 month lows.

The results were impressive: Positive 87% of the time, with median gains of 11.2%.

My explanation: Investors being this negative at the same time as markets hitting all time highs suggest to me that they are under-invested in equities and are frustrated they have missed the run up. The past history shown by Goepfert also suggests they will eventually acquiesce, and join the long side.

If you want to use sentiment as Contrary Indicator, that capitulation will set up your top and reversal. We are not, however, anywhere close to that point.


click for larger table

Source: SentimenTrader



Individual Investors Are Not Buying It
Jason Goepfert
Sentiment Trader, April 11, 2013

Category: Contrary Indicators, Investing, Quantitative, Sentiment

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

24 Responses to “Putting Investor Bearish Sentiment into Context”

  1. neddyj says:

    Barry -

    Your theory as to why is probably correct, however – aren’t other sentiment surveys also noteworthy? My recollection of recent survey of investment advisors is that they are at pretty high levels in terms of bullishness. And what about consumer sentiment? Isn’t there also a read through when sentiment is dropping and the effect it has on markets? I think it would be interesting to see if in the past these sentiment indicators have been correlated, or at least more correlated than they are now. Taken by itself, the AAII number looks bullish for markets. Taken by itself, the investment advisor number looks bearish. Which number is right more of the time?

  2. Moss says:

    I also think many do not trust the system, some are waiting for a decline and some simply do not fully understand how the massive Central Bank liquidity pump drives the behavior of the professional market participants while marginally helping the economy.

  3. crjdriver says:

    @neddyj and Barry

    I too am having problems reconciling the different the difference between the AAII indicator and the Investment Advisor indivator. Throw in the consumer confidence numbers this morning (which I believe are more of a coincident indicator?) and I am failry confused as to the “state of confidence” . I understand they are generated from different data sources but any thoughts might be appreciated.

    • Angryman1 says:

      consumer confidence is the ultimate useless indicator. They mean nothing besides lagging sig.(I wouldn’t even call them coincident indicator).

  4. mad97123 says:

    It’s hard to see how this bearishness squares with margin debt nearing it old record highs.

  5. Barry, this is fantastic. I’ve been scratching my head since I saw this and this divergence between sentiment and prices was causing all sorts of disharmony in my brain.

    I wonder if some of this could also have to do with the nature of the action we saw in the last week. We had a market at all time highs that investors didn’t really trust. Then last Friday they felt the first tremors that re-enforced that latent skepticism, flipping them bearish all at once.

  6. sureseam says:

    Having done some programming I recall the cry of “develop program code to the standard” to which the usual reply was that the delight of standards being that there were so many to choose from. Similarly sentiment indicators should be respected and there are a range to choose from – each telling different things. Some of them might contribute to explaining this lofty market.

    This anthropomorphisation of the AAII is a hypothesis, at best, about a particular segment of traders who are beginning to feel great revulsion at the finance industry, enormous insecurity about pensions and a fundamental distrust of central government.

  7. gordo365 says:

    Applying Occom’s razor – maybe negative sentiment is due to 15 years sideways market, and 10+ years declining median income. Maybe it doesn’t have anything to do with health of this particular rally.

    • Except that since those same 15 years have elapsed, sentiment has been much more positive and negative. It fluctuates short term. That is what this metric measures

  8. idaman says:

    Barry, In this context, what’s your opinion of “sell in may, and go away”?

  9. poly says:

    The AA survey has a very “sketchy” record in my opinion. Look at the three S&P tops on this very chart for example, sentiment had already peaked and was near it’s low point. The big summer 2011 decline for instance shows sentiment bottomed while equities peaked.

  10. Clem Stone says:

    Too many crosscurrents pointing every direction. I can’t participate in that because it’s too easy to get whipsawed. I did see something regarding this AAII number saying it consists of approx 150 peoples’ opinions. That (and the more typical ~330 people?) seem like awfully small numbers to put much faith in, but their history as a contrary indicator is pretty good so again, I am befuddled.

  11. craig.r.jackson says:

    I dunno…looking at the first chart, when sentiment plummets from a high, the advisers are usually right, in the last two years.

  12. belsha says:

    I think there are two things to consider her.

    1.) Extreme bearish sentiment usually occurs after considerable drops of the market. Here, however, it is at an all-time high that we have a record bearish sentiment. I don’t know if there is a precedent for it and what happened, but it seems it is a premiere, a sort of black swan. I’m not sure if the usual contrarian interpretation (extreme bearishness = upcoming rally ) is valid here, since the situation is unprecdented

    2.) AAII sentiment is a much better (contrarian) indicator at market bottoms than at tops. While individual investors sentiment is always wrong at bottoms — they panic when the bottom is already in — their timing is shrewder on market tops. As you can see in the attached chart, it is never at the exact market tops that AAII are the most bullish, but rather 1/2 or 2/3 inmidst of the rallye. You can see for exemple, that during the QE2 rally, bullish extremes occured in december 2010 — 4 months before the top — and when the market topped on may 1st 2011, bullish sentiment already had very seriously plummeted.

    So, basically, I am not sure at all if the traditional contrarian reading is appropriate here. Yes, extreme bearishness is a sign of a market bottom, but even if stocks rally from here,were not at a bottom in any sense of the word, so the contrarian analysis doesn’t apply.

  13. Angryman1 says:

    There will be a eventually correction, this is all these “sentiments” are. Nothing goes straight up.

    I don’t get the big deal unless your a trader, you better know when to get pare down losses when the correction comes.

  14. rswojo says:

    My theory is individual investors are unhappy missing the run up but they have finally learned not to buy high. I missed the big rally but I made enough money in the last two bubbles so I will continue to wait and see what happens.

  15. chartist says:

    I never bought into the bearish thesis for the simple reason that a bear market top doesn’t give this many opportunities to sellout….I think the SPX sees 2000 before we peak out.

  16. Steve Duncan says:

    There are other investor sentiment metrics which are showing bullishness. Why are you only looking at the AAII Index?

  17. DiggidyDan says:

    I agree with Barry that the cyclical bull still has legs. I do not think it is necessarily a good time to be plowing a bunch of funds into stocks and bonds if you are in it for the long term. Next parabolic pop could spell trouble. . . People are doubting the rally, it slowly climbs higher, despite their misgivings, and then everybody caves, jumps in for a final feeding frenzy before the sharks turn on them.

    Interesting thing to me right now, though, is the divergence of base commodities, energy, precious metals, etc. If the market keeps going up, but commodity prices are going down despite Fed juice, what does that mean for the markets, and will there ever be enough inflation to remove the juice in the next 5 years?

  18. gloeschi says:

    So much ink spilled over an indicator which has basically zero correlation with future stock market return over any period you wish to test it against. Best r squared is 0.02 (t+24 weeks). Test it for yourself.

  19. [...] Putting Investor Bearish Sentiment into Context (The Big Picture) [...]

  20. gkm says:

    Regarding the recent sentiment post, note the date of this article –

    Back in November, I noted in a comment that an indicator was pointing bullish. That same indicator triggered this week, again bullish. However, it triggered at all time highs and I think should be viewed with at least some skepticism this time. This would be for a few reasons:

    - that indicator can trigger on both sides within a range as market forces vie for trend, so I wouldn’t be surprised to see more chop near term
    - there are several divergences in the market that need to be reconciled
    - some of the indices have broken to new all time highs, but not yet on a meaningful time frame (i.e. this month, this quarter)
    - the Dow is now within a region of what I consider a LT measured move level, but while the basis for this has proven important historically, it remains to be seen if it still has any merit (it was grazed but never really tested in 2007)

    Now, I note this caution in spite of (but also because of) the fact that other indicators are extremely bullish up to and including the monthly time frame for the SPX and INDU. That is because this type of move has been known to reverse rather dramatically. So in other words: respect the trend, but don’t get carried away by it. In my experience, the daily trend of the SPX and INDU is fairly critical because of this week’s indications; possibly even to the longer time frames.

    One final thought that occurs to me would be that the above referenced article may have not recognized the macro divergence to which it alluded. Why were mom and pop bearish? Were they focused on the imploding housing market and reflecting that in their sentiment? If they are bearish now, what is it that they see that those who are so narrowly focused on the stock market don’t? Are they right or are they wrong? I have no clue and perhaps once again neither does the market.

    So right now, I think I will focus not on my thinking – but on my sitting, or as best as I can manage.

    • That was May 2007 — 6 months before the peak !

      2 weeks later it was 36.61%, by Mid July it was 30% even. The week before and after the market’s highs the bear measure was 25.30% and 25.77%.

      Given this range, what are we to make of a high signal 5 or 6 months prior to the last top?