Individual Investor Sentiment:
Are Low Bullish Readings a Rational Representation or Do They Signal a Buying Opportunity?

Brian Callahan, President and Portfolio Manager

May 26, 2020

At ICON, we invest according to our valuation system and don’t rely on emotions.  With value as our guide, we remain fully invested and have been participating in the market recovery through April and May.  We also believe that the market leads the economy.  In today’s world, that means even as our economy suffers during this pandemic, the market has already priced in many of the economic fears.  Therefore, if one sees low bullish readings of AAII sentiment as contrarian, the current market could actually be a historic buying opportunity.

According to the website for the American Association of Individual Investors (AAII), “Since 1987, AAII members have been answering the same simple question each week. 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 has tracked these investor sentiment readings and have noticed that investors do not always behave rationally.

For purposes of this commentary, we’re focusing on the AAII bullish sentiment.  In the chart below, we’ve noted 5 previous examples of bullish sentiment readings.  It is our belief that when investors surveyed by AAII have low bullish sentiment readings, that may signal a market bottom.  The lowest reading in our example showed 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.  Other low bullish sentiment readings in our chart had similar results.  Our interpretation is that these sentiment readings can be contrarian readings of a possible market bottom.

The most recent readings from this survey show a 23.67% bullish sentiment on 5/7/2020 and a 23.31% bullish sentiment on 5/14/2020.  These readings are well within the historical readings shown in the chart above.  If the 12-month return following these readings charts similarly to the ones gathered above, we may have likely seen the market bottom and are on our way to a market recovery rally.

The data quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the data quoted. Please call 1-800-828-4881 or visit www.InvestwithICON.com for performance results current to the most recent month-end. Results are net of fees and calculated in U.S. dollars.

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 InvestWithICON.com or call 1-800-828-4881 for the most recent copy of ICON’s Form ADV, Part 2.