The Scary Part About This Selling? Investors Aren't Scared

Last week it was pointed out - and we highlighted it - that the American Association of Individual Investors (AAII) was as collectively bearish as they've been in years. Of its members, 48.9% of them now count themselves as officially bearish, versus 20.9% of them being bullish. The other 30.2% of them are neutral. That's the highest bearish sentiment seen since mid-2013.

There are two interpretations of the data. One of them is the straightforward interpretation that suggests the crowd is right... that the next several months could be marked by even lower lows. The other interpretation is the less conventional but usually-more-right one, which suggests that stocks are at or near a major low.

See, history shows that, in general, the crowd is most wrong when it's most sure it's right.

AAII Historical Data

It's not just philosophical contrarianism. The graphic below compares historical AAII bearishness and bullishness to the S&P 500. It's not difficult to see that investors were the most worried when they should have been most bullish. And, vice versa. We were similarly bearish in January of 2016, at a major bottom, and conversely, we were wildly bullish in January of this year, right before a big pullback.



Though history says this is a contrarian buy signal, that doesn't inherently mean the market's set to bounce straight away.

One of the shortcomings of using the AAII data as a contrarian tool is its lack of laser-like precision. It may well be right in telling us the selling is at or near exhaustion, but the pivot point could be weeks from now... and a lot can happen in just a few weeks. To that end, know that none of the usual short-term sentiment tools we normally consider have said we've seen a fear-based selling climax. The pullback, as big and painful as it's been, has been oddly orderly.

S&P 500 vs. TRIN, VIX and Put/Call Ratio

The graphic below compares the S&P 500 to (in order, from top to bottom) the NYSE's Arms Index - you know it better as TRIN - the S&P 500's put/call ratio, and the VIX. All three tend to surge when investors are panicking and flushing their portfolios. We saw this happen clearly on all three fronts in February, and though we had to do it again to a lesser degree in March, there's no denying that peak in fear was a major bottom for stocks.

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