Two of our favorite sentiment surveys are historically far apart
Two popular sentiment surveys that we follow are showing vastly different outlooks for investors. You would expect some optimism given that the S&P 500 Index (SPX) is up 15% on the year and less than 5% away from its all-time high. The sentiment survey done by Investors Intelligence (II) shows optimism just as one would expect. The survey put out by the American Association of Individual Investors (AAII), however, shows investors are almost twice as likely to say they are bullish rather than bearish.
The chart below shows the 10-week average of the percentage of bulls in each poll. The 10-week percentage of bulls in the AAII poll have fallen below 30% while the bulls in the II poll have stayed above 50%. That is a massive difference of opinion. Let’s look at which poll has been more prophetic in the past in these situations.
Two Polls, Two Methodologies
The two polls are quite different in how they are conducted. The Investors Intelligence poll is a compilation of published newsletters that the editors at Investors Intelligence decipher as being bullish, bearish or expecting a correction (this means short-term bearish but long-term bullish). The AAII poll, on the other hand, is a simple question each week for its members. They simply answer whether they are bullish, bearish, or neutral on the stock market over the next six months.
The different methodologies for the polls make the AAII poll much more volatile than the II poll. Newsletters which have been published are much more likely to hold on to their past view so that they are eventually proven correct. The AAII poll is an anonymous survey so it’s much easier to suddenly go from bullish to bearish or vice versa.
Which Poll to Believe?
The latest reading for the II poll shows 55.3% of newsletters are bullish on stocks. Individual investors who took the AAII survey see it differently as only 21.4% of respondents said they were bullish. The chart below plots the AAII bulls vs. the II bulls since 1988. The red dot shows the most recent data point and it shows how out of sync these two polls are currently.
The first full year we have data on both polls is 1988. The tables below look at each poll separately given their current situation. For the II poll, I looked at times it showed more than 50% bulls (I only consider one signal over a six-month period). For the AAII poll, I gathered data on when the poll showed bulls at less than 25% (again, one signal every six months).
The third table below shows typical S&P 500 return data since 1988 to give you a reference point. As a contrarian would expect, when the sentiment shows optimism, like in the first table, returns tend to underperform. When investors are pessimistic, like in the second table, the returns outperform.
Something must give. There have only been four other times since 1988 when these data points have overlapped (II bulls are over 50% while the AAII bulls are below 25%). The table below shows the dates and how the S&P 500 performed going forward. The second table below summarizes the data. In each of the occurrences since 2003, the S&P 500 did well, gaining double-digits over the next year. The three and six-month returns were all positive as well. Stocks struggled after the first occurrence of this in 1989.
It’s only four data points so there’s nothing conclusive about the numbers. But it is encouraging, even in a limited data set, to have the numbers on your side with the last three signals showing bullish returns going forward when these polls diverge in this manner.
