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.
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
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