This blog post is a excerpt from a recent TSI commentary.
As the name suggests, the weekly American Association of Individual
Investors (AAII) sentiment survey is an attempt to measure the sentiment of
individual investors. The AAII members who respond to the survey indicate
whether they are bullish, neutral or bearish with regard to the US stock
market’s performance over the coming 6 months. The AAII then publishes the
results as percentages (the percentages that are bullish, neutral and
bearish). The Consensus-inc. survey is a little different in that a) it is based
on the published views of brokerage analysts and independent advisory
services and b) the result is a single number indicating the bullish
percentage. However, the results of both surveys should be contrary
indicators because in both cases the surveyed population comes under the
broad category affectionately known as “dumb money”.
In other words, in both cases it would be normal for high bullish
percentages to occur near market tops (when the next big move is to the
downside) and for low bullish percentages to occur near market bottoms (when
the next big move is to the upside). That’s why the current situation is
strange.
With the S&P500 Index (SPX) having made an all-time high as recently
as last month and still being within two percent of its high it would be
normal for sentiment to be near an optimistic extreme. As evidenced by the
blue line on the following chart, that’s exactly what the Consensus-inc
survey is indicating. However, the black line on the following chart shows
that the AAII survey is indicating something very different. Whereas the
Consensus-inc bullish percentage is currently near the top of its 15-year
range, as would be expected given the price action, the AAII bullish
percentage is currently near the BOTTOM of its 15-year range. According to
the AAII sentiment survey, individual investors are only slightly more
bullish now than they were at the crescendo of the Global Financial Crisis in
November-2008.
The conflict between the AAII survey results and both the price action and
the results of other sentiment surveys (the AAII survey is definitely the
‘odd man out’) suggests that small-scale retail investors have, as a group,
given up on the stock market and are generally ignoring the bullish opinions
of mainstream analysts and advisors. We are pretty sure that a similar set of
circumstances has not arisen at any time over the past 40 years, although it
may well have arisen during an earlier period.
The lack of interest in the stock market on the part of small-scale
individual investors could be construed as bullish, but we don’t see it that
way. To us, the fact that the market has come this far and reached such a
high valuation without much participation by the “little guy” suggests that
the cyclical bull market will run its course without such participation. It
also suggests to us that the cyclical bull market is more likely to end via a
gradual rolling-over than an upside blow-off, because upside blow-offs in
major financial markets require exuberance from the general public.
