The Bullish S&P Signal Not Seen in 5 Years

Tidal waves of American Association of Individual Investors (AAII) optimism have preceded huge S&P 500 Index (SPX) rallies in the past

Andrea Kramer
Mar 11, 2016 at 3:18 PM
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In mid-January, the S&P 500 Index (SPX) slipped back into correction territory, small-caps officially entered a bear market, and the number of self-proclaimed bulls hit its lowest point in more than a decade, per the American Association of Individual Investors (AAII) survey. Since then, however, the bulls have re-emerged with a vengeance -- and these tidal waves of optimism have historically preceded major S&P rallies.

Specifically, the number of self-identified AAII bulls has surged nearly 109% during the past nine weeks. Since 1987, this is just the 19th occurrence where the number of bulls has more than doubled in such a short span, according to Schaeffer's Quantitative Analyst Chris Prybal. The last time this happened was October 2010, which preceded a one-year (252-day) rally of 66.6% for the S&P 500 Index.

What's more, the SPX has averaged a one-year return of 49.1% following these signals, and has been positive a whopping 83% of the time. For comparison, SPX's average one-year return is 8.6% since 1987, with 77% positive. In fact, the last time the S&P was negative one year after this signal was 2006, just before the dawn of the financial crisis -- and the index was only 0.3% lower one year out.

Further, across all time frames that we measured, the S&P has outperformed following a massive rush of AAII bulls. For instance, 10 days after a signal, the index has averaged a gain of 1.6%, and has been positive 72% of the time. The SPX's anytime 10-day return since 1987 is 0.3%, on average, with just 59% positive. This, combined with the fact that March and April are historically good times to be long, could suggest even more upside ahead for stocks.


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