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Multiyear Records for AAII Survey

Chart In Focus
April 14, 2022

The American Association of Individual Investors ( surveys its members every week to see if they are bullish, bearish, or neutral.  This week’s data, released on Thursday, April 14, 2022, showed the most negative bull-bear spread since April 2013.  The last time we saw negative sentiment like this in the AAII survey was in the summer of 2020, as investors were still worried about the Covid Crash that had unfolded in March 2020.  That worry helped to fuel a long bull market.  And the Fed’s QE helped a lot too.

Some analysts criticize the AAII’s survey methodology, and with good reason.  The participants in the survey volunteer themselves, as opposed to a random telephone poll for example.  And the participants may change from week to week, as individuals decide to cast a vote or not.  This is not how a proper survey should be done, but doing a proper survey is a lot more expensive.  And even a “proper” survey is still going to be a flawed representation of the whole population; that’s just a feature of any type of survey. 

With all that said, we can move forward and look at this week’s readings of 15.8% bulls and 48.4% bears, confident that these numbers are not going to be perfectly accurate.  But they can still probably be seen as useful to contemplate as a statement about investor sentiment.  Sentiment reflects a “condition”, not a “signal”.

Even more noteworthy than the bull-bear spread being the worst since 2013 is the observation that the bullish percentage alone was the lowest since 1992, and it was the 9th lowest bullish percentage ever.  The AAII survey only began in July 1987, so we do not know what it would have told us during any period in history before 1987. 

I find it interesting that all of the bullish percentage readings lower than this week’s occurred between 1987 and 1992.  Here is a chart of that period, just for fun.

aaii bullish percentage 1987-92

So why would the AAII members have been so much more pessimistic as a group back then versus more recent years?  One point to consider is that AAII members tend to be older, because people start worrying more about their investments when they realize they are going to need to look after them.  That does not typically happen when an individual is in his 20s.  So the AAII survey respondents who participated in the late 1980s have likely died off by now, and been replaced by others.

There was also a difference in methodology years ago.  Now the survey is done on the AAII’s web site.  But there was no such thing as a web site in the 1980s. 

The AAII members participating in the survey in the late 1980s had all lived through the Crash of 1987, and heard all of the stories about how it was 1929 all over again, and there was a great depression ahead.  Other signs showed that the market was healthy and recovering after the Dec. 4, 1987 retest low, but the narrative about another Great Depression remained in the public’s minds (and the media’s narratives) for a long time.  So it is natural that investors could get momentarily scared into rushing out of their bullish opinions. 

In 1990, these investors had a real live shooting war to worry about when Iraq invaded Kuwait, and threatened to keep on going into Saudi Arabia’s oil fields.  So we saw more extreme readings of low rates of bullishness.

That older generation of survey respondents has since been replaced by a population that includes a lot of buy-the-dippers, who know that every dip has (eventually) been a great buying opportunity.  So even though they may get scared by market action from time to time, they tend not to get scared all the way out like in those early years. 

Until now.  Something has happened here in 2022 to cause investors’ hearts to make a hard turn away from their once-bullish norms.  The Fed contemplating larger interest rate hikes is assuredly one factor.  The war in Ukraine with no apparent resolution is another.  Add to that a 5.2% SP500 drawdown from the March 29 rebound high, and that was apparently enough to scare the AAII members into thinking that the sky really is falling.  But these survey respondents, like in most other surveys, have an excellent track record of being wrong when they all move together. 

That should mean an opportunity for prices to rebound, even if only for a short time, just to surprise the crowd to the greatest extent possible.

Tom McClellan
Editor, The McClellan Market Report

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