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Warning: Latest AAII Sentiment Reading is Out Of This World!

Extreme bullish sentiment does not bode well for the markets. Check out this piece from the SeekingAlpha website…

This week’s AAII sentiment survey is out, and the bullish sentiment is out of this world: 63% bullish and only 16% bearish, for a bull-bear spread of 47%!

This is the highest percent bullish since November 18, 2004 – after which the market flat-lined for almost a year until October 2005. It is the lowest percent bearish since November 24, 2005 – after which the market flat-lined until July 2006. It is the highest bull-bear spread since April 15, 2004 – after which the market flat-lined until October 2004. The four week moving average of the bull-bear spread is the highest since December 15, 2005 – after which the market essentially flat-lined until June 2006.

The three major sentiment indicators that I follow – call buying, the AAII survey, and insider transactions – have an excellent track record. Getting out of the market during extreme positive sentiment would have kept you out of Black Monday in 1987 (the biggest one-day percentage decline in history, -23%), the tech bubble crash in 2000 (a 42% decline, peak-to-trough), the October 2007, May 2008, and April 2010 peaks, plus a host of other smaller peaks that followed various relief rallies.


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