Back To The Future? Sentiment and Price Action Mirrors Early '90s

The S&P 500 Index (SPX) price action looks remarkably similar to 1993-1995, when the American Association of Individual Investors (AAII) streak of bulls below 50% hit a record

Senior Vice President of Research
Jan 19, 2017 at 12:49 PM
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The American Association of Individual Investors (AAII) weekly sentiment survey just showed the largest weekly drop in bullish sentiment since March 2016, with optimism fading ahead of Donald Trump's inauguration tomorrow. In fact, we are still in the middle of the second-longest streak of less than 50% bulls since the survey began in 1987. The current streak began on Jan. 8, 2015, and has lasted 107 weeks, or just over two years. The longest streak ever spanned 110 weeks, beginning Jan. 22, 1993 -- two days after Bill Clinton was inaugurated -- and ending in February 1995. Interestingly, both AAII streaks started when the S&P 500 Index (SPX) was at or near all-time highs, and stocks' subsequent trajectory is much the same.  

Below are two charts that track the price action of the SPX during the bull streaks. The charts look remarkably similar. From February 1993 to February 1995, the SPX made a choppy advance with occasional corrections, gaining nearly double-digit percentages. It seems a combination of corrections during this period and the fact that the market was only six years removed from the 1987 crash was enough to keep retail investors skeptical.

Fast-forward to the current AAII streak. Similar to the 1990s streak, the SPX is up around 10% over the current period, in a choppy advance with corrections along the way. And bigger-picture, the market is only 7-8 years removed from two bear markets over a 10-year period. If the price action over the next five years is anything like the price action from 1995 to 2000 -- wherein the SPX rallied more than 200% -- I think both bulls and bears will be surprised.

170119 SPX 1

170119 SPX 2

 

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