AAII survey still points to higher prices ahead

One of the sentiment indicators that we follow is the weekly survey conducted by the American Association of Individual Investors (AAII). In this poll, the AAII asks its membership where the market is heading in the next six months. Prior to last week’s report, the bears had outnumbered the bulls in this survey for 13 straight weeks. The poll can be very volatile, so it’s quite extraordinary that it stayed bearish for about three straight months. Let’s take a look at what has happened in the past following similarly lengthy streaks of bearishness in the weekly AAII roundup.

When the Streak Ends: It is quite rare to see such long streaks of bearishness. Data on the poll since 1987 is available and remarkably, this is just the sixth time that the bears have outnumbered the bulls for 13 straight weeks during a 25 year period. Below is a table showing other streaks of at least 13 weeks of bears outpacing the bulls, along with the S&P 500 Index returns over different time frames out to about six months.

In the summary, you’ll see the average of the returns after an occurrence as compared to the typical SPX returns over those time frames. Checking out the data, the returns after one of these signals outperforms what the market typically does — especially at the 8-week and 13-week time frames.

As natural contrarians, we expect this almost-unprecedented bearishness to have bullish implications. If the poll is indicating that investors are moving from a bearish outlook to a bullish outlook, then it may be quite a buying opportunity. That’s because the 13 weeks of bearishness is a sign that investors may have been keeping money on the sidelines — and if they’re turning bullish, that money could now begin flowing into the market to drive stocks higher. Bear in mind that short interest is still at relative highs too and the sentiment indicators from the options arena show a preponderance of bears.

Make sure you’re in this market before the rest of the crowd moves in.

Finally, below are a couple of SPX charts marking the signal dates in the table above.