Investor Sentiment Is Mixed But Trending More Bullish

The American Association of Individual Investors' Sentiment Survey release this week showed a continued trend towards more bullishness by individual investors. Bullish sentiment rose 3.8 percentage points to 45.6% and this is up from a low 21.4% in October of last year.

The below chart shows the 12-month forward return (maroon line) at various bullish sentiment levels. It is when the bullish sentiment is in the mid 50's to near 60% level that forward S&P 500 Index returns tend to be negative.

Many sentiment measures have moved towards more bullish or more risk-on over the last three months and as contrarian indicators this is suggesting a higher potential for a market pullback. Goldman Sach's summary below of the various sentiment measures shows where the indicators fall along the spectrum of risk-off to risk-on.

In spite of investor's expressing their bullishness, fund and ETF flows are indicative of a cautious investor. Outflows from equities and inflows into bonds or fixed income investments continue to be the norm over the last twelve months.

Finally, the CNN Business Fear & Greed Index has declined from its 'extreme' greed level. In the latest Fear & Greed report it is noted, "During the last five trading days, volume in put options has lagged volume in call options by 5.85% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors."

In summary, many sentiment measures are elevated and suggest the market could encounter a pullback, yet there are other sentiment measures noting a more cautious investor. The return for the market, specifically the S&P 500 Index has certainly been strong over the last two years as seen below. As noted in a recent post or two though, the catalyst for a market pullback is often unknown.