McClellan Chart In Focus: AAII Survey Shows Sentiment Washout – By Tom McClellan

Chart In Focus

The American Association of Individual Investors (AAII) releases its weekly survey of its members’ every Thursday, and this week shows a pretty big spread between the bulls (21%) and the bears (39%).  Another 39% of participants are “neutral”, and not willing to make a commitment about their opinion, and that’s actually a pretty high reading for the “neutrals”.

When investors shift over to saying that they are bearish in a pretty big way, it is usually a good marker for an intermediate term bottom for stock prices.  Big spikes to the bullish side do not always work out the same way, as they can sometimes be seen at the initiation of a strong new uptrend, such as the one starting after the Nov. 2016 elections.

The Bull-Bear Spread is the most common way that technical analysts look at the AAII data, but it is not the only way to do so.  One can look at the percentages for each category by themselves.  Here is a chart showing just the percentage of bulls:

AAII Survey %bulls

This week’s 21% reading is among the lowest of the last several years, and most of the time a very low reading like this will be a good marker of a price bottom.  That does not always work, however, as the episode in mid-2015 demonstrates. 

Here is a look at just the bears:

AAII %bears

In this case, readings of around 40% or higher make for pretty good bottom indications, although there can be exceptions as we saw in March 2017 with an anomalous 46% bearish reading which did not bring a bottom.

There is one additional way I like to look at these numbers, which is to see very sudden shift in the Bull-Bear Spread.  I do that with a 2-week change, as shown in this next chart:

AAII Bull-Bear Spread 2-week change

Note that this is not the same as a %ROC (rate of change) indicator you might use in a stock’s price.  Rather, it is the raw numerical change in the spread, since we are already dealing with percentages.  I have drawn a dashed line at the -0.2 level, which means minus 20 percentage points, and readings down below there tend to mark pretty good bottom indications for prices.

So here we are in the scary month of October, just following the scary month of September, and investors are following the script pretty well by saying that they are scared.  Right on time for a nice seasonal bottom.

Tom McClellan
Editor, The McClellan Market Report


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About the author

Sherman and Marian's son Tom McClellan has done extensive analytical spreadsheet development for the stock and commodities markets, including the synthesizing of the four-year Presidential Cycle Pattern. He has fine tuned the rules for interrelationships between financial markets to provide leading indications for important market and economic data. Tom is a graduate of the U.S. Military Academy at West Point where he studied aerospace engineering, and he served as an Army helicopter pilot for 11 years. He began his own study of market technical analysis while still in the Army, and discovered ways to expand the use of his parents' indicators to forecast future market turning points. Tom views the movements of prices in the financial market through the eyes of an engineer, which allows him to focus on what the data really say rather than interpreting events according to the same "conventional wisdom" used by other analysts. In 1993, he left the Army to join his father in pursuing a new career doing this type of analysis. Tom and Sherman spent the next 2 years refining their analysis techniques and laying groundwork. In April 1995 they launched their newsletter, The McClellan Market Report, an 8 page report covering the stock, bond, and gold markets, which is published twice a month. They utilize the unique indicators they have developed to present their view of the market's structure as well as their forecasts for future trend direction and the timing of turning points. A Daily Edition was added in February 1998 to give subscribers daily updates on their indicators and also provide market position indications for stocks, bonds and gold. Their subscribers range from individual investors to professional fund managers. Tom serves as editor of both publications, and runs the newsletter business from its location in Lakewood, WA.