AAII Sentiment Survey
APPLICABLE TIME FRAME(S):
Each Thursday morning by 9:00 AM EST
04/11/13......Bulls decline to lowest level since 2009
02/28/13......Bulls drop below 30%
08/08/12......The Farrell Sentiment Indicator Is Close To Triggering A Long-term Buy Signal
07/26/12......Bulls Among Individual Investors The Past 3 Months Hit The 4th-Lowest Level In 15 Years
07/19/12......Individuals' Sentiment Via The AAII Bull Ratio Dove Lower Despite A Market Rally
The AAII (American Association of Individual Investors) is a non-profit organization headquartered in Chicago, and was founded in 1978. Their stated mission is: "assisting individuals in becoming effective managers of their own assets through programs of education, information, and research." It is affiliated with NAIC, the organization that helped so many investment clubs get started in the late 1990's.
Obviously, their niche market is individual investors, and not professional traders, pension funds, or anything else institutional. Their focus, and the focus of the great majority of their membership, is long-term fundamental analysis of sound companies using a very minimal amount of technical analysis for decision-making purposes.
The AAII sentiment survey is a weekly poll conducted by that organization which intends to gauge the overall sentiment of their membership. They ask their membership where they think the market will be in six months, and group the responses into three categories: bullish, bearish or neutral.
Like most contrarian indicators, when the survey shows too many investors as being bullish, it very often corresponds to market highs. Conversely, too many bears suggest that the market may soon find a low.
Due to the noisy week-to-week nature of this survey, we also follow the weekly bull ratio and 4-week moving average of that ratio. The bull ratio is calculated as follows:
AAII BULL RATIO = % BULLS / (% BULLS + % BEARS)
So, for example, if one week we have 35% bulls and 45% bears, the bull ratio would be 44%:
AAII BULL RATIO = 35% / (35% + 45%) = 35% / 80% = 44%
We have found the most effective use for this data to be a 4-week moving average of the bull ratio, as defined above.
The AAII percentages are available each week in Barron's.
On the Bullish, Bearish and Bull Ratio charts, we have plotted the ratios with Bollinger Bands, a measure of volatility. The upper red lines and lower green lines are 1.5 (dotted) and 2.0 (solid) standard deviations from the one-year average reading, so when the ratios exceed those bands, we know we're seeing an extreme.
As a contrary indicator, when the ratios exceed the upper red lines, then that's an indication that individual investors are too bullish on the market, and we should be watching for a potential decline. Conversely, when the ratios drop below the lower green bands, then we know that folks are overly pessimistic and a market rally is more likely to ensue.
*Standard Deviation. See below for a description of standard deviation for the 4-week moving average of the bull ratio:
68% of readings (1 standard deviation) should be between 51% and 71%
95% of readings (2 standard deviations) should be between 41% and 81%
99% of readings (3 standard deviations) should be between 31% and 91%
In other words, we should expect a reading under 41% or over 81% approximately 3 times per year. Since such a reading would be relatively unusual, it suggests that we may be seeing an unsustainable trend. These figures assume a normal distribution curve.
American Association of Individual Investors (www.aaii.com)
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