When it comes to market bullishness or bearish, there’s an adage that says, “sentiment follows price,” which has rung true across the last several months. With AAII survey sentiment moving into positive territory last week, what should we take away?
When it comes to market bullishness or bearishness, there’s an adage that says, “sentiment follows price,” which has rung true across the last several months. The AAII Sentiment Survey Bull-Bear Spread (AAIISPREAD) moved negative in February, then plummeted in March and April before rallying with the market in May. In total, there were 15 straight weeks of negative sentiment before that ended last week, which is the 5th longest streak of all time. With investor sentiment briefly flipping back to positive territory, should we take that as a sign of better things to come for the market?
For those unfamiliar with the American Association of Individual Investors (AAII)’s surveys, they ask each of their members the direction they feel the stock market is headed over the next six month. The answers range from up (bullish), no change (neutral), to down (bearish). The sentiment spread is calculated by subtracting the percent of bearish respondents from the percent that are bullish. Positive readings mean there are more bulls than bears, with the opposite being true for negative readings.
In the previous four instances of 15-week negative streaks ending, the market performance was overwhelming positive over the next year. Each occasion was in the green three months out while the group averaged a one-year return of 27.4%. One note of caution is that the sixth longest streak of 14 weeks ended in March of 2008, but generally speaking, most streaks of 10 weeks or longer have played out well. The median one-year return for streaks that ended at 10 weeks or longer was 17.4%, along with an 80% positive rate.
Despite a brief return to positive sentiment, the AAIISpread moved back to bearish territory on Thursday at -8.97, which ranks in the third decile historically. In terms of sentiment, there’s a trend of stronger performance during low sentiment periods while high sentiment periods average more muted returns, especially at the extremes. Our current levels have seen solid returns over the next year, with the group averaging a one-year return north of 12.3%. Sentiment can only shed so much light on the market’s outlook, but the generally positive takeaways do align with positive technical picture for domestic equities, including strong readings from long-term participation (^PTSPX) and our core market percentile rank.
