AAII Survey of Investor Sentiment: This Sentiment Spread Stinks

4-09-2011: A Review of the AAII Survey ® of Individual Investor Sentiment.

The AAII Survey showed a Bull-Bear spread of 14.7% this week with 43.59% Bulls and 28.85% Bears.  (You can review all the data here: AAII Homepage)

So what does this mean? Going back to April 2010 when there were similar spreads of 13 on 4-29-2010, 19% on 4-15-2010, and 13% on 4-8-2010 we see that there is a potential for a major slide here.  The decline starting at the end of April 2010 was 17.2%.

If you go back further to 12-17-2009 when the spread was 14%, there was a rally of a 5.0% to the next high but that was followed by a correction of 9.2% that brought the SP500 index back to 1044.50 compared to 1096.08 on 12-17-2010.  On 10-15-2009 when the spread was 14%, the market pulled back from 1096.56 to 1036.19 for a fall of 5.5%.  On 1-8-2009, the spread was 14% and the SP500 index pulled back from 909.73 to the recent major low of 676.53 for a loss of 25.6% for the SP500 index.  Not very good news huh?!  The good news is that you will be prepared to take action, but only when you see other corroborating signals.

So the range of declines, and they were ALL declines, was from 5.5% to 25.6%.  Perhaps it will fall somewhere in between. Looking at the chart, a pullback of 7.7% would be the minimum and if it is worse, a retest of the April 2010 high would be a correction of 9.2%, which would be adequate to re-energize the Bull market.

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CONCLUSION: Remember that the AAII investor sentiment numbers are just one indication of where the markets are headed, so acting on AAII sentiment as your sole market timing indicator is not likely to serve you well. Still, the data this week does say that sentiment is not supportive of this rally continuing much further before a significant correction.

Standard Disclaimer: Remember, it’s your money and your decision as to how to invest it.

© 2011 David B. Durand, M.D. All rights reserved.

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