What The Biggest Bear Exodus in 7 Years Means for Stocks

How the SPX performs after a big drop in self-identified bears

Andrea Kramer
Sep 19, 2017 at 8:25 AM
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As the major stock indexes assailed record highs, the number of self-identified bears in the weekly American Association of Individual Investors (AAII) survey plummeted by 13.8 percentage points in the week ended Wednesday, Sept. 13 -- the largest one-week drop since July 2010. In fact, it's the first time in over a year that the number of AAII bears fell by 10 percentage points or more, with the last occurrence in February 2016, according to Schaeffer's Quantitative Analyst Chris Prybal. Against this backdrop, we decided to take a look at how the S&P 500 Index (SPX) tends to perform after a major exodus of bears.

AAII Bears Migrate to the Bullish Camp

So, where did all those AAII bears go last week? Most went directly to the bullish camp. While AAII bears fell to the lowest level since April 7, 2016, representing just 22% of AAII respondents, the number of self-proclaimed bulls jumped by 12 percentage points to 41.3% -- the highest since Jan. 11. It was the biggest percentage-point jump since April 26, and the biggest two-week bullish increase (16.3 percentage points) since Nov. 16, just after the presidential election. Nevertheless, the number of AAII bulls has been under 50% for 141 weeks, marking the longest streak on record.

Stock Performance After AAII Signals

Since 2009, there have been just 26 other times in which AAII bears dropped by 10 percentage points or more in the course of one week. Two weeks after these signals, the S&P 500 Index was up an average of 1.4%, and was positive 73% of the time. That's nearly triple the SPX's average two-week return of 0.5%, going back to 2009, with an average win rate of just 62%.

What's more, the SPX tends to outperform after these signals looking all the way out to six months (26 weeks). At the 13-week (three-month) marker, the SPX was higher an average of 5.1%, compared to an anytime average return of 3.5%. At both the three- and six-month marks, the S&P was in the black 88% of the time, compared to anytime win rates of 77% and 82%, respectively. And the index was up an average of 10.9% six months after a signal, compared to just 6.9% anytime.

S&P 500 Index after AAII bears drop

Are We Still Climbing a Wall of Worry?

So, should contrarians be concerned? Not just yet. As Schaeffer's Senior V.P. of Research Todd Salamone recently pointed out, the bullish percentage in the weekly AAII sentiment survey got as high as 75% in January 2000, and was at 65% around the March 2000 top. Ahead of the October 2007 peak, a weekly streak of consecutive bullish percentage readings ran below 50% from late January 2007 through late September 2007, before finally climbing to 54% in October 2007, just before the financial crisis. Again, our current AAII bullish percentage is just over 41%. 

Meanwhile, short interest is rising even as the SPX hits record highs, suggesting we're still "climbing a wall of worry." Until we hit the "euphoria" phase of the sentiment cycle, it's unlikely that a market top is imminent. However, if you're nervous, Salamone says, "call options should be considered so that you have less capital at risk." 

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