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AAII Individual Investor Sentiment Indicator

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Despite terrible economic data, Dow Jones Industrial Index and S&P 500 Index showed strong rebound in April and May. Is the market turning bullish?

In March, Wall Street halted intra-day trading 4 times after tumbling. Fundamentals were hitting the bottom, including a surge in unemployment rate and a signifiant decrease in domestic demand. As AAII Individual Investor Sentiment Indicator in May shows improvement, have the bad times passed?


What is AAII Investor Sentiment Survey?

The American Association of Individual Investors (AAII) conducts a weekly survey on retail investor’s sentiment towards the stock market for the next 6 months, the results being bullish, bearish and neutral. The survey first began in 1987 by mailing postcards; now it’s conducted online. During the past 30 years, 38.8% of the participants responded being bullish, 30.6% bearish and 30.5% neutral.

What does the result indicate?

  • It indicates when the market is reversing

In 2000, Kenneth L. Fisher observed the negative correlation between the AAII sentiment survey result and the market direction. When investors have been bullish for quite some time, the market corrects. When bearish sentiment reaches a bottom, it’s considered as a signal for a rebound. During the past 30 years, the bearish sentiment (the yellow line) rarely surpasses 50%. When it does, it can be considered as a warning.

  • It indicates the market direction in the short term

When investors are turning neutral/bullish from bearish/neutral, the stock market remains relatively stable, but it still incurs higher risks when there’s no good economic data to provide cushion. Investors should remain discreet and avoid being irrationally optimistic.

Conclusion

  • A peak in the bearish sentiment should be a signal of the market bottom.

  • A transition from bearish/neutral to neutral/bullish suggests the market will remain steady in the short run.

  • A rising bullish streak should allow you to foresee market correction.

AAII Individual Investor Sentiment Indicator can indicate the market direction in the short term, while the long-term market outlook depends on market fundamentals. Only when the fundamentals are robust & healthy enough that we can expect some good performance from the stock market.

See all data on US market fundamental → US Macro

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