Study: what happens next when investor sentiment is neutral


AAII is the stock market’s best sentiment gauge. Investors are extremely Neutral right now because the stock market has been swinging back and forth over the past few weeks.

This is the first time the Neutral % has exceeded 45% since May 2016. Here are the historical cases in which AAII Neutral exceeded 45% for the first time in 1 year (52 weeks).

  1. July 19, 1991
  2. June 9, 1994
  3. October 23, 1997
  4. August 5, 1999
  5. February 6, 2003
  6. April 9, 2015

Here’s what happened next to the S&P 500.

July 19, 1991

The S&P’s next 6.7% “small correction” began 4 months later in November. The S&P’s next “significant correction” began years later in 1994. The S&P trended higher over the next year.

June 9, 1994

AAII Neutral exceeded 45% AFTER the S&P completed a “significant correction”. The S&P trended higher over the next year.

October 23, 1997

This signal came out while the S&P was in the middle of a 13% “small correction”. The next “significant correction” began 10 months later.

August 5, 1999

This signal occurred in the middle of a 13.1% “small correction”. The bear market began 7 months later in March 2000.

February 6, 2003

This was 1 month before the bottom of the bear market. The S&P soared over the next year.

April 9, 2015

This was 1 month before the S&P’s 15.1% “significant correction” began. The Medium-Long Term Model predicted a significant correction around this time.

Conclusion

AAII Neutral exceeding 45% is a random sign for the stock market’s short term performance. It is neither a short term bullish sign nor a short term bearish sign for the stock market. Sometimes this signal comes out when the market is rallying and sometimes this signal comes out when the market is in the middle of a “small correction”.
However, this is a medium-long term bullish sign for stocks. The S&P 500 trended higher over the next 6-12 months in 5 of these 6 historical cases.

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