We wrote about the American Association of Individual Investors (AAII) poll results a few weeks ago. Since then, the bearish activity on the chart has broken a record for the poll. Going back to the poll’s inception in 1987, we have never seen four weeks in a row of bearish readings above 55%. We are now at bearish extremes for this indicator.
Remember that sentiment, which this poll measures, is contrarian. This means that when market participants are extraordinarily bearish, it is a bullish indication. The opposite also applies; extraordinarily bullish readings are bearish for the market.
Clearly, you can see that, even after and during the bear market in 2022, we never saw a cluster of readings this high. This has put the bull/bear ratio at a very low reading. Typically speaking, this would result in an upside reversal.
One thing we would say is that sometimes poll takers are RIGHT! So while we do see extremely bearish readings, we wouldn’t bet the house that this isn’t a bear market. At DecisionPoint.com we have been monitoring our indicators and participation and we are considering that we are in the throes of a bear market rally and that it isn’t likely to stick around. However, charts like this do have us wondering if the correction is all we’ll get.
Conclusion: Sentiment is extremely bearish on AAII and typically this will lead to a sustained rally. However, we have to understand that sometimes the respondents are correct and we’ll see more downside after all.
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