When asked what his three most important indicators were, one famous trend-follower responded: “Price, price, and price.” And I agree—the primary evidence of whether the market is healthy or not is determined by the trend of the major indexes and the action of individual leading growth stocks (which is my focus).
But that doesn’t mean I don’t track a variety of secondary indicators, such as broad market measures (percent of stocks above their 200-day line, etc.), inter-market relationships (financials, for instance, are often a leading indicator for S&P 500 … and they’re doing quite well lately) and sentiment indexes, which can tell you whether most investors are overly bullish (which usually precedes market downturns) or bearish (precedes upturns).
I would never advise trading solely on any secondary measure, but they can give an alert to a possible upcoming change in the market’s character, which is why I keep an eye on them.
That brings us to the weekly survey of the American Association of Individual Investors (AAII), which asks its members whether they are bullish, bearish or neutral on the market for the next six months. What we’ve seen lately is a major, sustained decrease in bullishness—during the past two months, just 27.6% of respondents (on average) have expected the market to head higher.
In fact, this is the fourth straight week that this figure has been below 30%. It certainly looks like individual investors have been worn out by the negative news and the choppy market environment, and think that—at best—the market will just chop around for another six months.
How unusual is this? Since 2000, such a prolonged streak of so few bulls has only been seen a handful of times—June 2012, March 2009, February-March 2008, and March 2003. And all of these turned out to be good buy points, at least in the intermediate-term.
One month after these depressed readings, the S&P 500 was up an average of 3%. Three months later, it was up an average of 11.3%, and perhaps more impressively, the index was positive every single time after three months. Looking out a full year, the average gain was 23%.
As I said above, measures like sentiment are secondary to what really counts (price, volume, etc.). And AAII is just one sentiment survey out of many. But the firm has been conducting this survey for nearly 30 years and extremes in sentiment have tended to line up pretty well with turning points in the market.
A growth stock and market timing expert, Michael Cintolo is the chief analyst of Cabot Growth Investor and Cabot Top Ten Trader. He is also a regular contributor to Cabot's free e-newsletter, Cabot Wealth Advisory.