Individual Investor Sentiment:
Do Low Bullish Reading Signal a Potential Rally?

Brian Callahan, President and Portfolio Manager

February, 2022

In May of 2020 we published commentary on the AAII Investor Sentiment Survey and the potential for low bullish readings to be a contrarian indicator of an impending rally in the markets. Historical data has shown us that timeframes of low sentiment readings, following specific market-events, often lead to steady growth over the long-term.

The recent, historically low reading of 20.96% on Jan. 20, 2022, is similarly close to the levels we’ve discussed previously – and seen as recently as May 2020, with readings of 23.67% and 23.31%.  Of note is that in the 12 months following those low bullish readings in 2020, the market again showed a propensity to rally with returns for the S&P 500 increasing almost 50% during that time frame (see table below).

ICON was fully invested over those 12 months and were in position to participate in the market rally as we correctly interpreted these sentiment readings as contrarian, believing the market setting was actually a historic buying opportunity and not the irrational setting investors had feared. We simply continue to invest according to our valuation system and don’t rely on emotions. With value as our guide, we remain fully invested today and believe that despite recent levels of negative investor sentiment the market still leads the economy.

So, the question remains: Are low bullish readings a rational representation of the market or do they signal a buying opportunity?

Since 1987, AAII members have been answering the same question each week, and according to the website for the American Association of Individual Investors (AAII) the “results are compiled into the AAII Investor Sentiment Survey, which offers insight into the mood of individual investors.”  Their question has always been, “Do they feel the direction of the stock market over the next six months will be up (bullish), no change (neutral) or down (bearish)?”  ICON tracks these investor sentiment readings and, as pointed out previously, we’ve noticed that investors do not always behave rationally.

As a reminder, we’re focusing on the AAII bullish sentiment and that it’s our belief that when investors surveyed by AAII have low bullish readings, it may signal a market bottom. In the table, we’ve again noted 5 previous examples of bullish sentiment readings and the subsequent 12-month return in the S&P 500. We’ve also added the readings and returns from May of 2020 mentioned above. The lowest reading in our example shows only 18.92% of those surveyed had a bullish feeling for the next 6-months. This low bullish sentiment reading was in March of 2009 and the S&P rallied 40.06% over the next 12 months. The low bullish sentiment readings from 2020 show even higher results with 12 month returns of 46.90% for the S&P 500 following the May 7^th survey, and 46.32% off the May 14^th survey.

With a low bullish sentiment reading of 20.96%, one of the lowest out of the nearly 1800 weeks, and in light of the market’s track record demonstrated in the chart above, are we poised for yet another rally? The data clearly shows a high probability for growth, and we’re fully invested to take advantage of the potential market recovery.

The data quoted represents past performance, which is no guarantee of future results. Investing in securities involves inherent risks, including the risk that you can lose the value of your investment. There is no assurance that the investment process will consistently lead to successful results. Index performance shown above is not representative of any ICON Funds product or service.

Opinions and forecasts regarding industries, companies and/or themes and portfolio composition and holdings are all subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security, industry or sector.

Investing in securities involves risks. There is no assurance that the investment process will consistently lead to successful results.

The unmanaged Standard & Poor’s (S&P) 500 Index is a market value-weighted index of large-cap common stocks considered representative of the broad market.

The AAII Investor Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of the AAII membership on a weekly basis. Only one vote per member is accepted in each weekly voting period.

Please visit ICON online at www.ICONAdvsiers.com or call 1-800-828-4881 for the most recent copy of ICON’s Form ADV, Part 2.