What is the AAII survey telling us?

Our replacement editor who usurped me (!) at the start of this month Zak Mir pointed out yesterday the high bullish readings from the AAII survey. See here – http://www.spreadbetmagazine.com/blog/aaii-goes-into-overdrive.html

Is this a sign to be cautious on the market we wonder? The last time we felt strongly about the direction we posted this piece here – http://www.spreadbetmagazine.com/blog/a-reminder-of-our-call-of-thurs-20-june-against-consensus.html and we are now contemplating taking out a Put Spread on the S&P 500 in our Global Macro fund with expiry around December. Any further move towards 1700 with a compression in the Put Call ratio beneath its last 3 year average around 0.65 will be our trigger. 

In itself the bullish and bearish disparity, although one of the largest spreads over the last 4 and half year bull run (and somewhat long in the tooth), we don’t believe this is a sole reason to sell but it is certainly a warning sign… Just as the indicator we pointed out above has a near 100% success rate in finding a bottom, the trio of 2 weeks of continued optimism in the AAII, a decline towards 0.55 on the Put:Call ratio and a deviation of around 10% from the 37 week ema has also a near 100% record in finding a top. One way to play this is via selling call options, particularly if you are positioned in long value plays that you do not want to come out of (mining for example). 

As you can see on the chart below, over the last 3 years, each time the S&P 500 has been stretched to 10% beyond its 37 day ema (circled in green) there has been a snapback towards it. Any move towards the key pyschological 1700 level should begin to set alarm bells ringing for the bulls.

At Titan, we have a Global Macro fund that looks to take advantage of precisely these types of opportunities in the marketplace. Click the banner below for more information.

By Richard Jennings, Fund Manager Titan Investment Partners. Www.titanip.co.uk