AAII Record Bear Streak Signals More Stock Gains Ahead

From a contrarian perspective, a high number of bearish investors could translate into gains for SPX stocks

Feb 16, 2017 at 2:18 PM

The American Association of Individual Investors (AAII) survey just did something for the first time in history. Specifically, the percentage of respondents identifying as bulls has been lodged below 50% for 111 consecutive weeks, topping the previous record of 110. The last time AAII was over 50% bullish was Jan. 2015.

In the aftermath of the previous record streak, stock returns were very strong, hinting at the merits of a contrarian trading approach. Specifically, following the 110-week streak from Jan. 1993 through Feb. 1995, the S&P 500 Index (SPX) went on to add 14.4% in the ensuing six months. By one year, the broad-market index was up an astounding 35.3%.

What could potentially power the SPX this time around is a sentiment shift among polled AAII investors, who are currently more bearish than usual. The most recent survey data showed the percentage of bulls dropped 2.7 percentage points to 33.1% in the preceding week, despite the broad-market rally. Historically, the average percentage of bulls is a much higher 38.4%. Meanwhile, the bearish percentage picked up 4.7 percentage points to 32.4%, versus a historical average of 30.3%.

That said, it appears short covering won't be a major source of gains for the SPX. Per the chart below, courtesy of Schaeffer's Quantitative Analyst Chris Prybal, short interest on SPX stocks just panned its lowest level in roughly two years. In fact, the last time these bearish bets sat under 6.5 billion shares was just before a sharp spike in short interest -- and a corresponding downturn in the stock market.

S&P 500 Index stock short interest since 2011

With the S&P 500 Index (SPX) fresh off a record high of 2,351.31, it's hard to justify disturbing bullish positions. However, as Schaeffer's Senior V.P. of Research Todd Salamone recently recommended, short-term traders may want to consider buying call options instead of stocks -- thereby limiting risk, while remaining open to further gains.

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