Typically, sentiment matters most at extremes, and I like to use it as a contrarian indicator. The way I learnt it was to beware of the crowd when the crowd is too one‐sided.
Currently, we are not at extreme levels. However, what caught my attention this week is that the Bull-Bear spread from the American Association of Individual Investors (AAII) has fallen below 0, while the S&P 500 has reached all-time highs.
Here’s the chart:
(right-click and open image in new tab to zoom in)
Let's break down what it shows:
The blue line represents the price of the S&P 500 index.
The red lines represent when the S&P 500 is at all-time highs while the AAII Bull-Bear spread is below 0.
The Takeaway: This is the first time in 30 weeks that the AAII Bull-Bear spread has dropped below 0. This indicates that there are more bears than bulls, and what stands out to me is that this has occurred while the S&P 500 is reaching new all-time highs. This event is rare. In the past 34 years, it has occurred only 23 times.
Individual investors seem to be scared!
But why is that?
VIX is at 13.
NAAIM is almost at 100.
Investors Intelligence survey shows a significantly higher number of bulls than bears.
So, what do individual investors know that the rest of the market doesn't?
When I look at the weight of the evidence, it still points to risk-on behavior.
Is this something we should be concerned about? Or not?
