Individual investors are now bearish based on the survey and expected volatility.
Since 1987, the American Association of Individual Investors has asked the same simple question each week to see what direction individual investors think the market is headed over the next six months.
Since the crowd tends to get it wrong at extremes, when I see sentiment reach a historic high or low, I take note.
The results are compiled into the AAII Investor Sentiment Survey, which offers insight into the mood of individual investors.
Falling bullish investor sentiment and rising bearish sentiment pushed the spread between bullish and bearish investors down to a low level.
Bearishness hasn’t historically trended much higher than this.
Bullish investor sentiment is about as low as it has been in history.
Neutral investor sentiment is about average.
Unlike the AAII Investor Sentiment Survey, the Fear & Greed Index, which tracks seven different investor sentiment indicators, is neutral.
Investor fear and greed oscillates over time as investors swing from the fear of missing out and the fear of losing more money. Fear and greed is neutral at mid field in the cycle and is pointing down again.
Investor sentiment gauges may not be the best market timers, but the Fear & Greed Index can be a useful gauge for investors to signal when you don’t want to be part of the crowd sentiment.
At extremes, most investors feel the wrong feeling at the wrong time, so if we are to create better results than the crowd, we must necessarily be thinking, feeling, and doing the opposite of the herd.
Expected volatility remains elevated, also signaling a higher than average level of fear.
After the biggest volatility expansion, ever, implied volatility (VIX) has settled down to 32, which is elevated. The CBOE Volatility Index (VIX) is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. The VIX is derived from the price of the S&P 500 index options, and provides a measure of market risk and investors’ sentiments.
So, I’m guessing one of two things is about to happen. Either this bearishness will prove wrong and the stock market will trend up, or it will get a lot worse.
It seems like investors are probably becoming more concerned about the new uptrend in COVID 19 cases.
I don’t believe Coronavirus was the primary driver of the stock market crash in March, but it may be more of an issue now the it continues to spread.
ABOUT MIKE SHELL
This piece does not necessarily reflect the opinion of Hedgeye.