This is an excerpt from the July 20, 2012 blog for Decision Point subscribers.
Last week the Rydex Ratio was displaying very bullish sentiment, and that is still the case. In rather stark contrast AAII Investor Sentiment* (American Association of Individual Investors) reflects very bearish sentiment this week, with 22% bulls and 42% bears. The ratio of bears to bulls is 0.53.
These are levels typically seen at market bottoms, not during price advances. Looking at the chart we can see that the percentage of bulls has much lower in the last three months than it was during the first quarter. And even though the market has been rallying for about seven weeks, confidence lost during the April-June decline has not rebounded at all.
The traditional interpretation of sentiment readings is contrarian, meaning that AAII Investor Sentiment is giving a bullish signal; however, we think we should also consider that investor confidence is lower than it ought to be in the context of a rally.
(*Sentiment data is provided courtesy of the American Association of Individual Investors (aaii.com). Polling is conducted on the AAII web site with a Wednesday cutoff and Thursday release.)
