Wednesday, July 25, 2012

Ready for a Bounceback?

The American Association of Individual Investors publishes a weekly survey of investor sentiment, and the latest one shows that investors have turned sharply negative. The number of people describing themselves as bullish has dropped to 22.2 percent, following the biggest single weekly decline in that measure since April.

Is that bad news for the stock market? Not necessarily. A researcher at the Web site Seeking Alpha has looked into how the investor sentiment reading correlates with movement in the markets, and found that when the bullish sentiment drops below 25 percent, the S&P 500 has a strong tendency to go up over the next six months. In other words, the more pessimistic investors get, the more likely we are to see a rebound in the equity market.

One obvious example: The all-time record for bearish sentiment in the AAII survey was set on March 5, 2009, when 70.3 percent of the respondents described themselves as pessimistic on the stock market. The S&P bottomed out the very next day, and has nearly doubled in the period since then.

No comments:

Post a Comment