AAII Sentiment Down Despite Strong Market

Bullish sentiment among investors declined this week, according to the weekly online survey of members of the American Association of Individual Investors. Bullish sentiment fell slightly to 47.10% from 49%, while bearish sentiment also fell to 26.8% from 27.74%. The percentage of investors who described themselves as neutral on the stock market increased to 26.1% from 23.23%.

This is where you have problems trying to use AAII sentiment as a trading indicator. Despite the market's relentless rise, retail investors are starting to turn cautious--the exact opposite of what they historically do when the market is strong. Ideally, you would have wanted to see bullish sentiment rise to around 55% in order to clearly signal a top in the market, but Mr. Market is making things difficult with this little twist. So while bullish sentiment is still high, it does not currently mean that the market cannot move higher from here. However, you rarely make money by following the retail traders and they are currently bullish. The bottom line is that right now may not be the best time to initiate new long positions. 

Here is a 6 month chart of AAII sentiment.

Click charts for larger image.

Next is a longer chart which compares AAII bullish sentiment with the SP 500.

Here is a chart which compares AAII bearish sentiment with the SP 500.

Black Swan Insights

Related Articles:
AAII Sentiment Rebounds--Oct 7, 2010
AAII Sentiment Down Again


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