Saturday, August 22, 2009

Investor Sentiment and Six Month Forward Market Return

The investor sentiment survey information detailed on this site comes from the American Association of Individual Investors. The AAII survey measures investor expectations about the future direction of the market, i.e., whether they are bullish, bearish, or neutral on the stock market for the next six months.

The below chart shows the 8-period moving average of investor bullish sentiment along with the forward six month return for the S&P 500 Index. In February the 8-period moving average of the bullishness reading was 29% and the market has advanced 26.39% since that point in time. The current 8-period moving average for this past week equals 39.35%. The relationship between this contrary indicator and forward market returns appears to be the strongest when the sentiment readings are at extreme levels.

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