Individual investors are increasingly optimistic about the stock market, according to the latest American Association of Individual Investors (AAII) Sentiment Survey.
The AAII Sentiment Survey is a widely recognized poll that evaluates individual investors’ sentiments or opinions about the direction of the stock market.
According to the latest figure, the survey showed 45.2% of American individual investors expressed a bullish outlook for the next six months, marking the highest level of bullish sentiment since November 2021.
At the same time, bearish sentiment continued to plummet with only 22.7% of the respondents expecting a pessimistic outlook for the stock market. This marks the lowest level in the bearish sentiment since July 2021.
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Why The AAII Survey Is A Strong Contrarian Indicator
The results of the survey serve as a valuable tool for understanding investor sentiment and often used as a contrarian indicator, indicating potential market turning points when sentiment reaches extreme levels of bullishness or bearishness.
The most recent instance of such high bullish sentiment was observed on November 11, 2021, when 48% of individual investors expressed optimism about the stock market, while only 24% held bearish views. During that week, the S&P 500 index traded around 4,700 points. However, six months later, the index experienced a 12% decline to around 4,150 levels.
It’s worth noting that the contrarian strategy did not yield significant results during the stock market’s recovery following the announcement of COVID-19 vaccine in November 2020. Despite increasing bullish sentiment among individual investors, the S&P 500 continued to rise in 2021.
The AAII Sentiment Survey has demonstrated an almost perfect contrarian superpower during significant market events such as the Great Financial Crisis.
On Oct. 11, 2007, the survey indicated a bullish sentiment of 54.6% compared to a bearish sentiment of 25.8%. During that week, the S&P 500 reached a peak of 1,565 points, a level it did not revisit until March 2013, after nearly six years. Subsequently, the S&P 500 experienced a decline of 10% in the following three months, 13% in six months and 42% within a year.
Historical Episodes Of Contrarian Signals Provided By The AAII Survey
| Date | Bullish Sentiment | Bearish Sentiment | Bull-Bear Spread | S&P 500 Performance |
|---|---|---|---|---|
| November 11, 2021 | 48% | 24% | 24% | -12% after 6 months, -18% after 1 year. |
| February 11, 2016 | 19.2% | 48.7% | -29.5% | +8% after 3 months, +13% after 6 months, +19% after 1 year |
| April 11, 2013 | 19.3% | 54.5% | -35.2% | +4% after 3 months, +8% after 6 months, +19% after 1 year |
| July 8, 2010 | 20.9% | 57% | -36.1% | +9% after 3 months, +19% after 6 months, +25% after 1 year |
| Early March 2009 | 18.9% | 70% | -51.1% | +34% after 3 months, +41% after 6 months, +58% after 1 year |
| October 11, 2007 | 54.6% | 25.8% | 28.8% | -10% after 3 months, -13% after 6 months, -42% after 1 year |
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