AAII Sentiment Survey Points to Further Upside

“It was interesting to read that several sentiment surveys have seen the bullish camp dwindle which doesn’t usually happen when the market stays as strong as it has been this week.” Charles Kirk – Thursday, August 5th

One of those surveys was the AAII survey of small investors, which saw a significant drop in the percentage of bullish investors and a large rise in the bearish percentage despite the S&P500 posting another solid up week, the fourth consecutive week of higher highs. That comment from Charles prompted me to check if the seemingly unwarranted jump in bearish sentiment was a positive sign from a contrarian perspective. I looked back through the last 20+ years of AAII data to find occurrences similar to this past week… a higher weekly high, low and close for the S&P500 that coincided with a 2%+ rise in bearish sentiment and a 2%+ drop in bullish sentiment (and a majority of bears). Looking out two weeks, the results were consistently positive, suggesting there is indeed a bullish contrarian edge…

AAII Bears +2%, Bulls -2%, Bears > Bulls on SPX Rally Week
08/06/10… S&P500 ??? two weeks later
03/26/10… S&P500 +2.4% two weeks later
10/09/09… S&P500 +0.8% two weeks later
05/22/09… S&P500 +6.0% two weeks later
04/09/09… S&P500 +1.1% two weeks later
03/27/09… S&P500 +5.0% two weeks later
08/08/08… S&P500 -0.3% two weeks later
06/01/07… S&P500 -0.2% two weeks later
05/04/07… S&P500 +1.1% two weeks later
04/05/07… S&P500 +2.8% two weeks later
10/06/06… S&P500 +1.4% two weeks later
08/04/06… S&P500 +1.8% two weeks later
06/02/06… S&P500 -2.9% two weeks later (*)
10/28/05… S&P500 +3.0% two weeks later
04/29/05… S&P500 -0.2% two weeks later
04/12/01… S&P500 +5.9% two weeks later
04/26/96… S&P500 -0.2% two weeks later
07/29/94… S&P500 +0.8% two weeks later
05/20/94… S&P500 +1.2% two weeks later
12/03/93… S&P500 +0.3% two weeks later
10/01/93… S&P500 +1.8% two weeks later
08/27/93… S&P500 +0.3% two weeks later
03/05/93… S&P500 +0.9% two weeks later
09/04/92… S&P500 +1.4% two weeks later
07/31/92… S&P500 -1.0% two weeks later
07/02/92… S&P500 +0.9% two weeks later
10/18/91… S&P500 -0.3% two weeks later
11/16/90… S&P500 +1.6% two weeks later
10/05/90… S&P500 +0.3% two weeks later
03/02/90… S&P500 +1.9% two weeks later
11/17/89… S&P500 +2.6% two weeks later

In 23 out of the last 30 occurreces, or 77% of the time, the S&P was higher two weeks later, well above the 58% random chance. Even more impressive is that only one case out of the last thirty led to an S&P down over 1% two weeks later, while 16 led to an S&P up over 1% two weeks later. That’s a solid indication that the market is likely to be trading at a similar level or higher when August options expiration rolls around in a couple of weeks.

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

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