Trader’s Narrative

Here’s a quick recap of sentiment indicators for the past week as I saw them:

AAII Sentiment Survey
Retail investors are feeling rather cheeky with 48% bullish and only 36% bearish. Just a few weeks ago less than a third were bullish, and now almost half are. I’m surprised by this quick move.

According to contrarian analysis, this isn’t a good omen for the market going forward. According to data from 1988 to 2007, the market performs best when AAII sentiment is bearish. The more gloomy, the better.

[EDIT: About 3 weeks later (on Jan 2nd), AAII bearishness rocketed to 55%]

The S&P 500 has gone up an average of 18.1% 26 weeks after a bearish sentiment reading above 50%. Right now, we aren’t even close to this sort of pessimism. So be careful out there.

Investor’s Intelligence
Stock newsletter editors are by far too optimistic now. According to Burke only 25.6% are bearish and 53.3% bullish. Too much euphoria right now in newsletter land. I’d be careful since this matches the other sentiment readings.

LowRisk
According to LowRisk, there are 36% bulls and 30% bears. The last time there were more bulls than bears was back in November 20th.

The four week moving average of the bull ratio is above 50% - a level which usually corresponds with thin air altitudes for the market.