The Sentiment Survey Flashing a 'Buy' Signal for S&P Stocks

Bullish sentiment on the AAII survey has more than doubled in the last three weeks

Alex Eppstein
Nov 29, 2016 at 12:08 PM
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The latest American Association of Individual Investors (AAII) survey suggests bullish optimism is on a rapid rise. Specifically, the percentage of self-identified bulls increased by 3.2 percentage points over the past week to 49.9% -- its highest level since Jan. 1, 2015. For comparison's sake, the historical average for bullish sentiment is 38.5%.

Even more impressive, the proportion of bullish investors has spiked by more than 26 percentage points over the last three weeks -- the largest increase over a three-week time span since September 2010, according to Schaeffer's Quantitative Analyst Chris Prybal. Put differently, upbeat sentiment has jumped 111% in less than a month.

Below, Prybal puts the recent AAII data within its historical context. The most recent doubling of bullish sentiment represents the 11th instance since 1988, and the first occasion in more than six years. Prybal also shows how the S&P 500 Index (SPX) tends to perform following these signals:

AAII SPX 1 November 29

Based on the above, the SPX tends to outperform in the short term, after bullish AAII sentiment doubles (or more) over a three-week time period. For example, the average one-week post-signal return is 0.5%, versus an anytime one-week return of 0.2%. Going out four weeks, the post-signal SPX gain is nearly 2%, roughly doubling the typical at-any-time return.

However, the S&P's longer-term prospects are murkier. On average, following a jump in bullish AAII sentiment, the broad-market index has advanced 1% over the next eight weeks, easily underperforming the anytime eight-week gain of 2%. Going out to 26 weeks (or a half-year), the trend continues with post-signal and anytime gains of 2.8% and 5.6%, respectively. Here's a look at the SPX over the last 30 years, with three-week bullish rises indicated in orange:

AAII SPX 2 November 29

On a related sentiment note, the National Association of Active Investment Managers (NAAIM) exposure index just increased for its third consecutive week. The average reading of 86.6 is well above the historical norm of 59.4, and is also the highest level since early September. In other words, it's not just individual investors who are growing bullish, but also money managers.

NAAIM SPX November 29

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