Friday, May 08, 2020

Approaching Maximum Investor Bearish Sentiment Level

Not to surprising that the individual investor sentiment as reported by the American Association of Individual Investors (AAII) this week continues to deteriorate. As seen in the below chart, this week's bullish sentiment is reported at 23.7% down 6.9 percentage points from the prior week. The economic reports over the last few weeks have been absolutely terrible and it does not seem the reported economic data can get much worse. However, as states are now in the process of reopening their economies, better economic data may not be on the too distant horizon.

All of the decline in the bullish sentiment reading showed up in the bearish reading. In addition, investors that had been neutral from a sentiment perspective also tilted more bearish this week with the neutral reading declining 1.7 percentage points. The end result is the bull/bear spread now stands at -29%.

The individual investor sentiment measures are contrarian ones and are more actionable at their extremes. Although the recent sentiment reports are not at extreme levels, they are near them. Additionally, with states beginning to reopen their economies, pent up demand could result in an acceleration in consumer spending and thus an improvement in the economic data several months out. Improvement is unlikely to occur in a straight line, but it is improvement nonetheless.

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