Boosting Market Returns with Quantitative Analysis of AAII Asset Allocation Survey
Global stock markets were turbulent over the past week and market sentiment has soured. The greed index fell sharply in recent days, while the American Association of Individual Investors (AAII) recently revealed that bearish sentiment among retail investors reached the highest level since May. For a while now, retail investors have been valuable to professional traders, by analyzing their decision-making and determining whether the market is overheated or oversold. Consequently, we conduct a series of quantitative backtests using the AAII Asset Allocation Monthly Survey to better understand its usefulness as a tool for investors.

Celebrating our 8th anniversary at MacroMicro, we're excited to offer you a special gift. Join MM Prime or use the free trial code PRIME7D to get the MacroVision Dashboard for free.


The AAII is well known for its weekly sentiment survey among US retail investors, mainly due to its simplicity as it categorizes sentiment as either bullish, bearish or neutral. However, the AAII also publishes a more detailed monthly survey on asset allocations at the beginning of each month. The survey asks participants to report their holdings of stocks, bonds and cash, which is then aggregated and displayed as relative ratios of total stock, bond and cash asset allocations.

What is the AAII Asset Allocation Survey?

From the figures below, on average, US stock investors allocate about 60% of their liquid assets to stocks, with cash and bonds accounting for about 20% each. The survey report allows us to observe the monthly change in asset allocations by US retail investors, helping provide some concrete evidence of market confidence. The relationship between the S&P 500 and cash allocations is inversely related, meaning investors tend to hold more cash when stocks are doing poorly, especially during severe economic downturns. Conversely, the S&P 500 is positively correlated with stock allocations.

aaiicash Note: The asset allocation survey data is adjusted by a 6-month moving average.

Backtesting the Asset Allocation Survey: Which Indicator Should be used for Stock and Bond Allocations?

To determine whether the AAII asset allocation ratio survey has any reference value, we conducted separate backtests for stock and bond assets:


Note 1: The trend is determined by whether the 6-month moving average of the cash allocation ratio is greater than the 6-month moving average of the previous month, where " Trend Upward" represents the cumulative return of the S&P 500/ S&P US Treasury 20+ Year TR Index when the allocation trend is upward, and " Trend Downward " represents the cumulative return of the S&P 500/ S&P US Treasury 20+ Year TR Index when the allocation trend is downward. Note 2: The asset allocation survey data is adjusted for the data publication time.

The result show, that...

Log-in to view full article

Volatility- Volatility indexes as indicators for S&P 500 Euro- the second largest currency in the world