The Sentiment Survey That May Have Just Flashed an S&P Buy Signal

Traders are becoming more bullish, according to the American Association of Individual Investors (AAII) sentiment survey

by Josh Selway

Published on Mar 24, 2016 at 12:06 PM

At Schaeffer's, we're regularly checking trader surveys and polls to gauge sentiment on the stock market. One in particular we like to look at is the American Association of Individual Investors (AAII) survey, which noted a substantial drop-off in bullish sentiment at the start of 2016. More recently, the AAII survey has signaled some bullish trends, and according to Schaeffer's Quantitative Analyst Chris Prybal, another buy signal may have just occurred. 

Prybal's study centered around the 10-week moving average of the percentage of traders who identify as bullish in the survey. Specifically, he looked at returns after this moving average dropped below 30% and then rebounded at least 5 percentage points off its lows. 

For example, the 10-week moving average for bullish sentiment bottomed at 24% last month. This week, the moving average came in at 29%, meeting the conditions set forth above. Looking back to 2000, the typical returns for the S&P 500 Index (SPX) following such a jump in the 10-week moving average are quite impressive. 


As you can see, stocks have responded extremely well to this signal following four of its five previous occurrences. Going out just 21 days after a signal, the SPX has averaged a 6.1% gain. If you expand the time frame, the SPX has posted an average 252-day gain of 43% after previous signals, and has been positive over this period three out of four times. Obviously, this bodes well for bullish traders. 

The discrepancies between SPX post-signal standard deviation and SPX at-any-time standard deviation are also worth noting. Looking out 21 days and beyond, the SPX's standard deviation following this signal has more than doubled the anytime standard deviation. As such, this sudden surge in the AAII 10-week moving average of bullish sentiment could be forecasting increased volatility ahead.  


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