We delve into the history and calculation of the AAII Sentiment Survey, as well as what market sentiment analysis aims to measure, what bearish versus bullish indicators are and how to use market sentiment to invest.
About the AAII Sentiment Survey
Each week, we ask AAII members a simple question: Do you feel the direction of the stock market over the next six months will be up (bullish), no change (neutral) or down (bearish)?
We refer to this question as the AAII Sentiment Survey. Since we started polling our members in 1987, the AAII Investor Sentiment Survey has provided insight into the moods of individual investors.
The AAII Sentiment Survey has become a widely followed measure. Its results are circulated by various organizations and media outlets, including Barron's and Bloomberg.
The AAII Investor Sentiment Survey is conducted each week from Thursday 12:01 a.m. until Wednesday at 11:59 p.m. AAII members participate by voting in the survey above. The AAII Sentiment Survey is open to all members, though a weekly email is sent to a rotating group of members reminding them to participate. Results of the AAII Sentiment Survey are automatically tabulated by our database and published online early each Thursday morning.
The AAII Sentiment Survey provides investors a way to avoid hindsight bias. Hindsight bias occurs when a person believes the outcome of a future event is predictable by studying the past. Looking at market sentiment helps investors think about the future, rather than focus too heavily on historical data and events.
What Does the AAII Investor Sentiment Survey Indicate?
Bullish market sentiment—the percentage of respondents that say the market will trend up over the next six months—has averaged 38.0% over the life of the survey. Neutral market sentiment—the percentage that sees no change in market direction—has averaged 31.5%. Bearish sentiment—the percentage that think the market will trend down—has averaged 30.5% over the life of the survey.
The survey's results can be described as a pendulum that, at times, stays on one side or the other for prolonged periods. Both bearish and bullish sentiments have, at times, stayed above their respective historical averages for several weeks or months. At other times, the market sentiment pendulum has stayed close to center, with individual investors' moods staying largely within their historical averages.
When reviewing the data of the AAII Sentiment Survey, a variety of indicators and criteria should also be considered before making a tactical change in asset allocation based on the results. Market sentiment should be one indicator to analyze, but not used in isolation by itself.
What Is a Contrarian Indicator?
If you're looking at the AAII Investor Sentiment Survey for guidance on the possible future direction of the market, it's important to understand that it is deemed a contrarian indicator. But what does that mean?
A contrarian indicator tells investors that it may be a good time to go in the opposite direction of the herd. Contrarian indicators include ratios and other financial metrics like the put-call ratio, which measures the market sentiment of options traders. The market tends to move against the mood of the investors measured by contrarian indicators.
Contrarian investing strategies prompt investors and firms to enter the market when others are feeling negative about it. Therefore, if the AAII Sentiment Survey indicates a high level of bearish market sentiment, contrarian investors will expect a market uptrend.
This strategy involves betting against existing market trends to find an opportunity that other investors may not see or be aware of. Contrarian investors look for buying opportunities where stocks are undervalued. Adopting a contrarian investing strategy takes time, research and understanding of market indicators. It is considered a risky strategy, especially for beginners.
What Is Investor Sentiment?
Investor sentiment, also referred to as market sentiment, is the general mood of investors toward the market. It's important to understand that investor sentiment is not an exact science and doesn't always provide a true indicator of future price increases and or decreases.
Short-term investors and financial/technical analysts often rely on investor sentiment because it helps them value investments in the short term. It also helps them evaluate what is driving price fluctuations, which are often caused by investors' emotions, economic events and media coverage.
Investor sentiment is often expressed as “bearish” or “bullish.” Additionally, investors can be described as being either “fearful” or “greedy,” depending on market sentiment. These are terms that help investors measure the mood and tone of market sentiment, which we delve into later.
What Does Investor Sentiment Measure?
As mentioned above, market sentiment analysis is not an exact science; therefore, investors should approach the labels associated with sentiment with caution.
However, financial analysts and investors use investor sentiment analysis to gauge how positive and negative market sentiment is driving price fluctuations and creating opportunities.
What Are Common Market Sentiment Indicators?
Market sentiment indicators are psychology-based ratios or calculations that attempt to quantify investor mood toward the market in order to predict how current beliefs and positions may affect future market behavior. However, remember that this information should always be taken with a grain of salt and not in isolation.
Some common market sentiment indicators include:
- Put-Call Ratio
- Mutual Fund Money Flows
- CBOE Volatility Index (VIX)
- AAII Sentiment Survey
- Bullish Percent Index (BPI)
- Margin Debt
- High-Low Index
Investors may use market sentiment indicators to analyze trends and assets, as well as to judge the overall state of the economy from the perspective of the participants involved.
Bearish Versus Bullish Indicators
A bullish indicator means there's a general investor sentiment that a stock or market will trend upward based on signals, patterns or the overall tone of the market. In contrast, a bearish indicator means that investors expect a stock or market to trend downwards.
Bearish and bullish indicators can measure either short term or long term sentiment and can apply to the entire market or specific securities.
An investor who is using technical analysis to look at market sentiment will analyze a mix of patterns, indicators and signals. Bullish technical indicators include:
- Relative Strength Index (RSI)
- Cup-and-Handle Pattern
- Moving Averages
- Bollinger Band Width
- Candlestick Bullish Reversal Patterns
In comparison, bearish technical indicators include:
- Bear Flag
- Bear Pennant
- Head and Shoulders
- Descending Triangle
- Bias Pivot Point
- Candlestick Bearish Reversal Patterns
Fear and Greed Index: Stock Market
It is widely known that the stock market is often driven by two main emotions: fear and greed. It is human nature to take investor sentiment into account when making investment decisions, even if it's not always accurate or data-driven.
The fear and greed index, first developed by CNNMoney, aims to measure these two primary emotions since they have been found to influence how much investors are willing to pay for stocks.
What Does Fear and Greed Measure?
The logic behind “fear” and “greed” in the stock market is based on the finding that fear tends to drive down the prices of securities such as stocks, and greed tends to have the opposite effect by increasing share prices exponentially.
What Do Cryptocurrency Fear and Greed Sentiments Indicate?
Cryptocurrency fear and greed surveys aim to gauge which emotion is driving the cryptocurrency market. Just like the stock market, a cryptocurrency sentiment index showing a high level of fear may indicate to investors that most people analyzing the market are worried about potential downward trends; however, it can indicate to other investors that this is an opportunity to invest in more cryptocurrency. In comparison, cryptocurrency sentiment showing a high level of greed would indicate that investors are investing more of their money, which could potentially mean that the market is due for a correction.
As with other sentiment indicators, investors should consider other data points before drawing a conclusion from one cryptocurrency fear and greed index. Some cryptocurrency sentiment indexes also consider volatility and volume, as well as activity in the general media and on online forums.
Using the AAII Sentiment Survey to Invest
The AAII Sentiment Survey should be used in conjunction with other resources and tools such as historical data, screens, power rankings and grades—all offered with our A+ Investor subscription. We recommend using AAII sentiment data alongside other data-driven resources to ensure you are not making rash decisions when it comes to investing. Investors who consider themselves beginners should filter potential stocks and funds using comprehensive screens as well as time-tested strategies with a knowledge of market sentiment in the back of their mind.
At AAII, we believe that letting emotions govern investment behavior often leads to irrational decision-making, especially when you are using this as your sole research.
We stand behind the fact that sticking to a long-term plan based on sound fundamentals and data-driven techniques or strategies is the best way to become an effective individual investor. Subscribe to A+ Investor or become an AAII member today.
As an enthusiast deeply entrenched in the world of financial markets, sentiment analysis, and investment strategies, my extensive knowledge is founded on years of experience, continuous learning, and a passion for understanding the intricacies of market behavior. I have closely followed the dynamics of investor sentiment, delving into various indicators and surveys to discern patterns and trends that shape market movements. In the realm of sentiment analysis, one key tool that has captured my attention is the AAII Sentiment Survey.
The AAII Sentiment Survey is a venerable instrument in the financial world, dating back to 1987. It involves posing a straightforward question to AAII (American Association of Individual Investors) members: Do you believe the stock market will trend up (bullish), remain unchanged (neutral), or trend down (bearish) over the next six months? This survey has evolved into a widely followed measure, with results disseminated by reputable organizations such as Barron's and Bloomberg.
The historical data derived from the AAII Sentiment Survey presents a fascinating snapshot of investor moods. Bullish sentiment, indicating optimism about the market's future direction, has averaged 38.0%, while neutral and bearish sentiments have hovered around 31.5% and 30.5%, respectively. This data forms a pendulum that swings between bullish and bearish extremes, reflecting the ebb and flow of market sentiment over time.
One crucial aspect to note is the survey's role in mitigating hindsight bias. By focusing on future expectations rather than past events, the AAII Sentiment Survey aids investors in making informed decisions. However, it is emphasized that this tool should not be used in isolation. A comprehensive analysis, considering various indicators and criteria, is essential for making well-informed investment decisions.
A key concept introduced in the article is that of a contrarian indicator. The AAII Sentiment Survey falls into this category, suggesting that when sentiment is overwhelmingly bearish, it may signal a potential market uptrend. Contrarian investing involves going against prevailing market sentiment, seeking opportunities that may be overlooked by the majority.
Investor sentiment, or market sentiment, is a broader concept encapsulating the general mood of investors toward the market. It is not an exact science, yet it plays a crucial role in short-term investment decisions. Sentiment is often expressed as "bearish" or "bullish," reflecting the prevailing tone of market participants.
The article introduces common market sentiment indicators, including the Put-Call Ratio, Mutual Fund Money Flows, CBOE Volatility Index (VIX), AAII Sentiment Survey, Bullish Percent Index (BPI), Margin Debt, and High-Low Index. These indicators are psychology-based ratios or calculations that attempt to quantify investor mood, providing insights into potential market behavior.
Understanding bearish and bullish indicators is crucial in interpreting market sentiment. Bullish indicators suggest an expectation of upward market trends, while bearish indicators indicate a belief in downward trends. Technical analysis, incorporating patterns and signals, helps investors navigate these indicators effectively.
The Fear and Greed Index, a tool driven by the emotions of fear and greed, is also introduced. This index aims to measure the prevailing sentiments in the stock market, with fear driving down prices and greed leading to price increases.
The article extends its discussion to cryptocurrency fear and greed sentiments, highlighting the parallels with traditional markets. Similar sentiments in the cryptocurrency market may signal potential opportunities or corrections.
In conclusion, the AAII Sentiment Survey is positioned as a valuable tool for investors, but it is emphasized that it should be used in conjunction with other resources and tools. The article advocates a data-driven approach, recommending the use of historical data, screens, power rankings, and comprehensive strategies to make informed investment decisions. The underlying philosophy is to resist emotional decision-making and adhere to a long-term plan based on sound fundamentals. Subscribing to the A+ Investor or becoming an AAII member is presented as a means to access a holistic set of resources for successful investing.