Saturday, March 23, 2013

The Usefulness of Investor Sentiment

The AAII (American Association of Individual Investors) maintains a sentiment survey with its members, and provides historical data all the way back to 1987.  The graph below shows the delta between the % of people saying they are bullish and the % saying they are bearish.

There are some interesting points, such as a peak in bullishness in Jan-2000, or a record low in bullishness in Mar-2009, both of which were great points to exit/enter the market respectively.  Oct-1990 was also quite low and another good time to enter the market.

However, there are also a lot of signals in the middle of the graph that don't seem super-correlated.  Dec-2003 is a peak, but was a good time to invest, for example.  If you look at forward-5yr-nominal-returns, the bullish % correlation value ("r-squared") is -0.32, and the bearish % is 0.13.  As you'd expect, the bullish one is negatively correlated with returns and the bearish one positively correlated, but neither is very strong.

In general, I would conclude that only when the values are very significantly different is it worth considering them, and even then probably in the context of other more fundamental indicators.

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