Earlier this week the American Association of Individual Investors (AAII) reported the results from their weekly Sentiment Survey. The report noted the bullish sentiment level was 33.5% which certainly indicates individual investors are not overly bullish. Sentiment readings are contrarian in nature so a high bullishness reading would be one cautionary factor for investors to take into account regarding the market’s future direction. Even the 8-period moving average (red line below) is at a subdued level.
One interesting detail from the Sentiment Survey is the elevated level of the neutral respondents. The top pane in the below chart shows the neutral rating at 46.3% which is certainly a high level. I was curious if prior elevated levels of the neutral rating were simply bulls masquerading as neutral respondents. In prior market peaks that were considered bubbles by many, i.e., the technology bubble and the financial crisis bubble, it was the elevated bullishness rating that provided a cautionary market signal and not the neutral rating. In fact, prior elevated neutral ratings seem less actionable in regards to a potential market pullback versus high bullishness levels.
Lastly, the below chart shows the S&P 500 Index with the percentage of bullishness respondents. The current bullishness level of 33.5% in the top pane is far below the bullishness level reached in earlier bubble peaks of the technology bubble and the financial crisis bubble.
For investors evaluating sentiment measures, it does appear an elevated bullishness level is more actionable than the high neutral reading. A high neutral reading seems indicative of an indecisive investor and not one that is overly bullish.