We have covered the impact of the magazine cover indicator before here. Another helpful sentiment indicator is also one of the most easily accessible and popular sentiment surveys – the American Association of Individual Investors. This is a weekly survey, free to access, where they ask individual investors this one simple question, ‘Do you feel the direction of the stock market over the next six months will be up (bullish), no change (neutral), or down (bearish)?’ The results are then collected and displayed on the AAII’s website. Here are the results from the last few weeks.
You can see that sentiment is a helpful tool for seeing how investors’ views shift.
How to use it
This is more art than science. Some analysts will wait for extremes in sentiment, for example, when the sentiment survey is 2 or 3 standard deviations outside of the normal range. This shows extreme and, potentially, poorly positioned investors. You can see on the AAII page here that historically speaking investor sentiment that is very bearish (2 standard deviations away from the average) is a bullish signal for stocks. However, according to the AAII, the best results may actually come from when investors are neutral. In June 2014, the AAII published records showing that unusually high levels of neutral sentiment have been followed by a median 52-week rise in the S&P500 of 5.2% and 10.7% respectively. So, extreme views of bullish, bearish, and neutral sentiment can offer opportunities. However, these sentiment readings should not be used as automatic buy or sell signals, but help form part of your analysis. It is quite striking on the latest sentiment print from the week ending November 30 that there was a large jump in this neutral on stocks as we head into the Fed’s blackout period.