The Sentiment Signal Not Seen Since the March 2009 Bottom

After a 90/90 down day, the number of AAII bulls is at its lowest point in years

by Andrea Kramer

Published on Jan 14, 2016 at 12:55 PM

Wednesday's steep sell-off -- which sent the S&P 500 Index (SPX) back into correction territory, and officially put small-caps in a bear market -- resulted in a 90/90 down day on the Desmond volume/price indicator, the first since mid-December. Essentially, these days are logged when more than 90% of the volume is down, and nine out of 10 stocks close lower. But as we noted earlier this month, these deep plunges often precede better-than-usual returns, and if the latest sentiment data is a contrarian indicator, there could be plenty of buying power on the sidelines.

The number of self-proclaimed bulls just hit its lowest point in more than a decade, according to the latest American Association of Individual Investors (AAII) survey. Specifically, just 17.9% of respondents identified as bullish this past week -- a drop of 4.3 percentage points from the previous week -- marking the lowest point since April 14, 2005 (at 16.5%). The four-week average of bullish sentiment now stands at 22.9%, which is the lowest reading since Feb. 20, 2003, notes Schaeffer's Quantitative Analyst Chris Prybal.

As such, the difference between bears and bulls is the highest since April 11, 2013. Plus, 82% of AAII respondents are either neutral or bearish, the most since mid-April 2005 (83.5%).

The four-week moving average of neutral and bearish respondents hit 77%, which tied with the week of March 12, 2009 -- coinciding with the post-financial-crisis bottom, just before stocks went on a long-term run higher. Prior to that, you'd have to go back to February 2003 (also 77%), Prybal said. The all-time high of this moving average occurred in the late 1980s/early 1990s, right around 80%.


Echoing this, Credit Suisse today said its Global Risk Appetite Index just slipped into panic territory for the first time since October. From an Expectational Analysis standpoint, this sentiment backdrop suggests there could be more buying power on the sidelines, should stocks stage a notable comeback. 

However, the 10-day, equity-only, buy-to-open put/call volume ratio just turned higher from a low, as noted by Schaeffer's Senior VP of Research Todd Salamone, in the latest edition of Monday Morning Outlook. "So, even though the market has sold off sharply, a risk is optimists becoming pessimists in the weeks ahead -- further pressuring stocks, or resulting in only short-lived, minor rallies," he wrote.

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