The Bulls Go Out to Pasture, and Netflix Gets Trampled

A Sentimental Journey

How bullish are we feeling? If the American Association of Individual Investors’ weekly survey is anything to go by, not very. It has been carried out for decades and is much followed as a measure of sentiment. Retail investors are simply asked if they’re feeling bullish, bearish, or neither. And this week, fewer called themselves bullish than in any week since September 1992:

This is quite something. There were more bulls after 9/11, during the Covid lockdown, and in the throes of the Global Financial Crisis, than there are now. Most of us can intuit that sentiment is weak and shaken at present. The nastiness of pandemic-era life, and now the war in Ukraine and the sharp rise in inflation, will see to that. But lack of bullishness on this scale is startling.

A more complete measure of sentiment takes the spread between bulls and bears. On this basis, sentiment looks far more nuanced, as many investors are noncommittal when answering the questionnaire, and the proportion calling themselves bearish is still just under 50%:

I’ll admit to being very fond of the AAII as a market-timing sentiment gauge, as I used it in what turned out to be one of my most fortuitously timed columns ever. On March 9, 2009, the day the great post-GFC rally started, I greeted my readers with the words: “Perhaps the greatest reason for hope at present is that almost all hope seems to have been lost.” The generational low for the AAII bulls-minus-bears measure, plainly visible in the chart, was the center of my argument. As it made me look good, I tend to be thankful to the survey.

But how good a buying signal does the AAII survey send, really? The charts above show some obvious extreme moments. Looking just at the bulls, there were big dips in September 2002, and again in April 2005. Using the bulls-bears measure, the buying signals flashed in October 1990 (when Saddam Hussein had occupied Kuwait and there was great uncertainty over how he could be moved out) and March 2009, the nadir of the GFC. Here is how the S&P 500 performed in the five years (please disregard the calendar years on the x-axis) after each of those sentiment buying signals: