Last month, optimism and pessimism in our weekly Sentiment Survey reached unusual levels. Bullish sentiment plunged to 20.9% on December 12, 2018, while bearish sentiment jumped to a multi-year high of 50.3% by the end of December. Of the two, unusually low readings for optimism have a stronger record of being a contrarian indicator.
The table displayed below on the web version of this commentary shows the historical performance of the S&P 500 index following the unusual readings for our sentiment measures: bullish, neutral and bearish. As I was updating it, I revisited the annual rankings of average bullish sentiment. Specifically, I looked to see how 2018’s average level of optimism compares to past years.
Last year, bullish sentiment averaged 36.4%. This ranks 2018 as having the 10th lowest level of optimism over the survey’s 31.5-year history. (The survey started in July 1987.) What’s more interesting is the recent trend: 2015, 2016, 2017 and 2018 all rank in the bottom 10 when it comes to average levels of bullish sentiment. Put another way, if we were to split the annual averages into thirds, the last four years would all be placed in the bottom tier in terms of how optimistic AAII members were about the short-term direction of the stock market.
More on AAII.com
- Analyzing the AAII Sentiment Survey Without Hindsight – I discussed how we determine what an unusually high or low reading is, and our rationale for doing so, in this 2014 AAII Journal article. The data is older, but the explanations remain valid.
- Investment Sentiment Indicators: Quite Contrary? – In this 2004 article, Mark Hulbert discussed the history of sentiment indicators and made observations on their usefulness.
Highlights from this month’s AAII Journal
- Mighty Minis: Tiny Titans Stand Tall in 2018 – One year made a big difference for this AAII screen, which went from being among the worst performers to being the best in terms of calendar-year performance.
- The Model Shadow Stock Portfolio’s Drawdowns and Rewards– Investors who have been able to withstand the portfolio’s downside volatility have been rewarded with strong bull market reversals.
AAII Sentiment Survey
Pessimism remained above 40% for the fourth consecutive week, the longest such stretch since the fall of 2011. More about this week’s results.
- Bullish: 33.0%, up 1.5 points
- Neutral: 24.2%, up 6.1 points
- Bearish: 42.8%, down 7.5 points
- Bullish: 38.5%
- Neutral: 31.0%
- Bearish: 30.5%
Take the Sentiment Survey.
AAII Asset Allocation Survey
Cash allocations rose to their highest level in nearly six years. Additionally, nearly one out of four respondents to last month’s special question said they increased their exposure to cash. More about the latest results.
- Stocks and stock funds: 62.4%, down 2.2 percentage points
- Bonds and bond funds: 15.8%, unchanged
- Cash: 21.8%, up 2.1 percentage points
- Stocks: 27.9%, down 3.3 percentage points
- Stock funds: 34.6%, up 1.1 percentage points
- Bonds: 4.2%, up 0.8 percentage points
- Bond funds: 11.6, down 0.8 percentage points
Take the Asset Allocation Survey.
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The Week Ahead
We’ll start to enter fourth-quarter earnings season with S&P 500 members Constellation Brands Inc. (STZ) and Lennar Corp. (LEN) reporting on Wednesday, Delta Air Lines Inc. (DAL) reporting on Thursday and BlackRock Inc. (BLK) reporting on Friday.
The week’s first economic reports will be the November factory orders and the Institute for Supply Management’s (ISM) December non-manufacturing index, both of which will be released on Monday. Tuesday will feature November international trade and the November JOLTS report. The minutes from last month’s Federal Open Market Committee (FOMC) meeting will be released on Wednesday. The December consumer price index (CPI) is currently scheduled to be released on Friday, though given the ongoing government shutdown, it may be delayed—as might other economic reports.
Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!