With AAII Bullish Sentiment Near Historical Highs, Is A Market Top Imminent?

According to the latest AAII sentiment survey, the retail crowd has evidently had one too many drinks from Zimbabwe Ben's limitless punchbowl (now with extra alcohol). Does this mean the market is near a top or simply vulnerable to a market correction to sober up some overly optimistic bulls?

Let's take a look at the current AAII reading and compare it to other movements of unwarranted bullish sentiment. Right now, 63.3% of retail traders are bullish and expect higher prices. Only 16.4% are bearish and no doubt are regretting every minute of it, indicating widespread complacency within the markets.

How does this compare historically for the AAII sentiment survey? The average sentiment is 39% bullish with occasional readings above 50% with a few occasions of 65% or better. The all time high for bullish sentiment was back in early 2000 (1-6-00 to be precise) at the height of the dot com mania, where every housewife was making a fortune day trading Internet stocks. Just the kind of days our criminal Chairman of the Fed is trying to bring back. It was at this time that bullish sentiment hit 75%, indicating the entire market was positioned for perpetually high stock prices. We, of course, know what followed as we entered a secular bear market in stocks.

I have looked back over the last 10 years see what has happened 3 weeks and then again 3 months after a bullish sentiment reading of 63% or more and bearish sentiment below 20%. Here are the results:

  • Since Jan. 2000, the condition (that is, a bullish sentiment of 63%) has only occurred 14 times making it very rare.
  • 3 weeks later the market was up 50% of the time, which does not help very much and is akin to tossing a coin
  • 3 months later market was down 57% of the time, which does not exactly make you comfortable betting the farm either way
  • There was a strong cluster of these signals in late 2003-early 2004, which as we know now meant higher stock prices ultimately.
So what can we conclude from the current AAII sentiment reading? It is obvious that while helpful, the AAII sentiment indicator is far from perfect and should never be relied upon in isolation. It also shows that the market can stay irrational longer than you can remain short. While most people obsess about the AAII bullish sentiment, I think the bearish sentiment is a better indicator to watch. It is currently very low and suggests to me a correction rather than a top in the market. This will no doubt disappoint the bears who have been praying for a market top for quite some time. I was in the game in 2009, but gradually I saw that money printing equates to higher stock prices, regardless of economic fundamentals. The Fed does not care anymore about the appearance of monetary prudence. If the market starts to fall as it did in May-August period, the Fed will simply print more money! It is tragedy that the market is a mere reflection not of the economy, but only government interventions and manipulations. Trade accordingly! 

Now here are the charts.

click charts for larger image

Here is a shorter term chart of AAII sentiment

Here is a longer term chart which compares AAII bullish sentiment to the SP 500

Here is a longer term chart of AAII bearish sentiment compared to the SP 500

Black Swan Insights


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