Investor confidence survey

The American Association of Individual Investors polls its members on a weekly basis to measure their sentiment, and compiles this into a survey made of 3 categories, or possible responses: bullish, neutral, or bearish. While most indicators get checked on a monthly basis, this one is far more frequent and can give to those looking for a market pulse, a quick glance.

Below is the chart which includes data since the late 1980s. You can see at first glance that there are three problems with the chart and responses.

  • Problem #1: the data is so crowded it is not legible. This can easily be remedied by using the time window and reducing it to the interval to say, two years.
  • Problem #2: are investors lunatic? From a week or a month to another, swings from bullishness to bearishness, back to bullishness about the economy is impressive to say the least. The only interpretation I can think of is the fact that most “investors” polled aren’t buying equities or assets for the long term. Someone’s long term view cannot change this fast, by this much.
  • Problem #3: investor confidence (particularly when asking a large group) is a contrarian indicator. When everyone’s bearish, consider if it’s time to become bullish.

Source: American Association of Individual Investor

(1988-2011: Average bullish = 39% | Average neutral = 31% | Average bearish = 30%)

The next chart is a variation from the weekly figures. It takes only the bullish votes into account to avoid multi-line overlapping, and takes a 6-month (26-week) average to smooth out sharp week-to-week variations. This version could almost be called “adjusted for lunacy”, but the results are still to be taken with a grain of salt. Of all indicators the investor sentiment provides the benefit of a frequent pulse but it is difficult to identify trends of correlations with moves in equity valuations.

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