The latest weekly data from the American Association of Individual Investors (AAII) showed the percentage of individual investors who are bullish about short-term market expectations at very depressed levels (20.4%), and continued the trend of an extremely elevated proportion of bearish investors (55.9%). This puts the spread between the bulls and the bears at -35.5%, only the 21st time in the survey’s 35 year history the reading has been this pessimistic.
As shown in the LPL Chart of the Day, investor sentiment, as measured by the spread between bulls and bears in the AAII data, is still in extreme territory, more than two standard deviations below its long-term average. The mid-summer stock market bounce had brought some bulls back, with the bull-bear spread getting close to zero by mid-August, but since then investor sentiment has fallen along with the stock markets, with the spread reaching a low of -43 in mid-September (the fourth most pessimistic ever).
We continue to view the AAII as a contrarian indicator with extremes in negative sentiment tending, on average, bullish for near-term stock market returns and extreme investor optimism tending to be bearish for the near-term outlook. The more extreme the pessimism (or optimism) the greater the outperformance (or underperformance) over the next year. When the spread has been as low as it is now (-35.5 or approximately 2.5 standard deviations below average), the returns a year out have been even stronger, with average returns of 7%, 16%, and 18% over 3, 6, and 12-month periods.
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All index and market data from FactSet and MarketWatch.
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