AAII Bearish Consensus Increases Fourth Consecutive Week, Hits Highest Level in Over a Decade

The latest AAII small investor sentiment survey reveals another sharp rise in
bearish sentiment. 59% of respondents consider themselves bearish in the
latest poll, compared with only 20% in the bullish camp. That’s the most
pessimistic reading this survey has recorded in over a decade. In fact there
was only one other period in the history of this survey (August & October
1990) in which the bearish consensus reached 59%, illustrating how extreme
negative sentiment has become. This week also marked the fourth consecutive
week with more bears than bulls. Typically, such a long period with a bearish
majority occurs after the market has already sold off, illustrating that small
investors react to, rather than anticipate market moves. By the time they turn
this persistently bearish, the selloff is usually just about over. The stock
market typically rallies over the following month, ultimately eroding the
excessively pessimistic sentiment. Every case of four consecutive weeks with
more bears than bulls on the AAII survey is noted in the table below. There
have been 21 separate occurrences since our database began in 1987. Note that
in only two cases was the S&P meaningfully lower one month later…

AAII Bears Over Bulls Four Consecutive Weeks
01/11/08… S&P500 ??? one month later
09/07/07… S&P500 +7.2% one month later
06/15/07… S&P500 +1.3% one month later
06/09/06… S&P500 +1.1% one month later
01/24/03… S&P500 -1.5% one month later (*)
10/11/02… S&P500 +7.1% one month later
07/19/02… S&P500 +9.6% one month later
06/14/02… S&P500 -8.5% one month later (*)
10/23/98… S&P500 +8.7% one month later
09/04/98… S&P500 +3.0% one month later
09/20/96… S&P500 +3.5% one month later
03/31/94… S&P500 +1.2% one month later
10/01/93… S&P500 +1.4% one month later
07/02/93… S&P500 +0.5% one month later
05/07/93… S&P500 +1.9% one month later
08/21/92… S&P500 +2.0% one month later
02/01/91… S&P500 +8.0% one month later
08/24/90… S&P500 -0.1% one month later
02/16/90… S&P500 +2.8% one month later
12/01/89… S&P500 +0.8% one month later
03/23/89… S&P500 +7.1% one month later
12/09/88… S&P500 +1.3% one month later

This also marked the fourth consecutive week that the AAII bearish consensus
has increased, a rare development. We’ve only seen this on eight other
occasions in the history of the survey, all of which are noted in the table
below…

AAII Bearish Consensus Increases Four Weeks
01/11/08… S&P500 ??? three weeks later
01/06/06… S&P500 -0.1% three weeks later
10/03/03… S&P500 -0.1% three weeks later
12/27/02… S&P500 +3.0% three weeks later
10/11/02… S&P500 +7.9% three weeks later
07/26/96… S&P500 +4.6% three weeks later
04/07/95… S&P500 +1.6% three weeks later
08/21/92… S&P500 +1.1% three weeks later
02/09/90… S&P500 +0.6% three weeks later

While eight occurrences isn’t a lot to work with, it’s noteworthy that in each
case the S&P was trading at the same level or higher three weeks later. This
jibes with the market’s tendency to push higher in the weeks following 500+
new lows discussed in Wednesday evening’s commentary.

Amidst the extreme negative sentiment, it’s noteworthy that institutional
investors, who have been strong sellers for most of the past three months,
have become better buyers as the S&P has challenged the 1400 level. Since the
beginning of the week, NYSE TICK action has remained consistently positive,
highlighting both a reduction in selling pressure and an increase in buying
power. This is most likely due in part to the potential for an aggressive move
by the Fed at or before the January 30th FOMC meeting, which was all but
confirmed Thursday in a speech by Fed Chairman Bernanke. Fed funds futures are
now pricing in nearly 100% odds of a 1/2 point cut at the late-January FOMC
meeting. Back-month contracts are pricing in a 3% fed funds target by this
summer, down from the current 4.25% level.

Our TICKscore indicator settled at a high +34 Thursday, its strongest close
since late November. You may recall that the cumulative version of the
TICKscore indicator shifted into a pattern of higher highs back on Monday.
That was a clue that institutions were no longer selling indiscriminately, but
instead were beginning to buy into the weakness. This trend has only
intensified in the last few sessions. While it’s unlikely to be smooth sailing
short-term given the potential for further weakness in the Nasdaq, the S&P is
likely to bounce back from short-term weakness as we head into the end of
January.

Categories : Archived EOD Commentary, End-of-Day Commentary

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