Friday, March 28, 2008


Michael Zhuang has a post at the Seeking Alpha blog about the AAII market sentiment poll that I've written about here in the past.

Investor sentiment is at its lowest since 1990 and second lowest since the American Association of Individual Investors [AAII] sentiment indicator began in 1987. On 2/7/08, the 8-week moving average bull/bear spread reached the low of -25% and has since hovered below -20%. What does it mean for investors that the bull/bear spread stands at -25%? And what is the bull/bear spread?

Current low investor sentiment is significant because there were only six instances (excluding this one) when it was below -15%. And only two instances when it was below -20%.

Zhuang looks at stock market returns when the spread reaches these extremes. The results are what a good contrarian would expect. Markets tend to rally after extremes such as this. Zhuang uses a moving average to smooth out the volatility of the poll. What I look for are a low number of bulls that stays low when the market rallies. At the January lows the bulls were in the low 20s but when the market rallied off those lows the bulls quickly jumped into the mid 30s. The bottom was not in. We'll have to see how this indicator plays out over the next few weeks, but if we get a rally and the bulls don't budge, the bottom is probably in.

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