AAII Investor Sentiment Numbers Are Strange

The American Asociation of Individual Investors (AAII) polls its members on a weekly basis, asking if they are bullish, bearish, or neutral for the next six months. Results are collected on the aaii.com website, with a Wednesday cutoff and Thursday release.

Sentiment polls tend to follow the market trend, with large percentages of bulls (and small percentages of bears) in rising markets and especially at market tops. The opposite is true when the market is in decline and at market bottoms. Also, sentiment is almost always a reflection of recent market action, so, even if the respondents are asked to project for the next six months, the psychological impact of market activity over the last few days will weigh most heavily in their response.

The latest AAII sentiment numbers released on April 11 were: Bulls 19.3%; Bears 54.5%; Neutral 26.2%. Looking at the chart below, we can see that these results are completely opposite of what we would normally expect when the market trend is up and new highs are being made. In fact, they are what we would expect to see when the market has been in an extended decline. Also note that the Bull/Bear Ratio at 0.35 is the lowest we have seen since the 2009 bear market bottom.

One possibility is that AAII posted the numbers incorrectly. I have tried to confirm with AAII that the numbers are correct, but I have received no response to my inquiry, and AAII has made no change to their posting (located at the lower left of their home page).

If the numbers are correct, I can draw only one conclusion, and that is that poll respondents are, in effect, trying to pick a top. There have been so many news stories, from fundamentalists and technicians alike, about the likelihood of a correction, that average investors are becoming extremely bearish as well.

Since sentiment polls are ultimately contrary indicators, we have to assume that the recent AAII poll results are bullish for the market in the short term (days to weeks).

Technical analysis is a windsock, not a crystal ball.

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