Sentiment Update: A Warning From the Not Too Distant Past

“Be fearful when others are greedy and greedy when others are fearful” ~Warren Buffett

The NAAIM (active money managers) survey for this week showed a sizable increase in bullish sentiment while the AAII (individual investors) survey showed a decrease in bullish sentiment. This week, with both sentiment surveys near[1]or higher than one standard deviation above their historical averages we will look at a warning from past surveys.

The NAAIM survey started in July of 2006 so we have four and a half years of data or 233 weekly surveys. In these 233 surveys there are only five times – including this week – where the NAAIM survey was above the current level and the AAII survey bullish sentiment was above 50%. See the table below.

Click to Expand






As can be seen when both sentiment surveys hit these levels in 2006, the market was able to rally for another year culminating with the all-time, nominal S&P 500 high in October of 2007. The two 2007 occurrences both resulted in one year declines. Over two years, all four occurrences resulted in a decline in the S&P 500 of over 30%! This is admittedly a small sample size and the market is currently not valued as richly as the other occurrences – as evidenced by the CAPE in table above – but it is a warning nonetheless worth considering. FYI – The current CAPE of 22.7 is well above the post-1900 average of 16.3.

This week, active managers have, on average, a 74.7% allocation to equities. This is up from 63% last week. The median allocation rose to 90% while the top quartile of active managers have an allocation of 100% or greater to equities with the bottom quartile up to a 73% or less equity exposure. The eight week moving average is now at 66%.

The NAAIM number measures current equity exposure (0% would be all cash, 100% fully invested). Additional detail can be found here.

Individual investor’s bullish sentiment decreased slightly to 50% this week from 53% in the prior week. Bearish sentiment rose to 27% from last week’s reading of 23%. The Bull-Bear spread is at 23%, well above the series average of 9%. The eight week moving average of bullish sentiment increased to 50%.

Individual investor sentiment is in the “extreme” territory; measured as one standard deviation above average. Active manager sentiment is just below the “extreme” level which is 75%.

For analysis of the subsequent equity returns based on sentiment surveys please see the flowing links. AAII research here and NAAIM research here.

[1] The NAAIM survey is at 74.7% with 75% being one standard deviation above the historical average.


3 responses to “Sentiment Update: A Warning From the Not Too Distant Past

  1. Pingback: money managers are very bullish on stocks |

  2. HallTreel December 31, 2010 at 7:01 am

    I like reading your site because you can always get us fresh and cool stuff, I feel that I ought to at least say a thank you for your hard work.

    – Henry

    • seekingdelta December 31, 2010 at 12:21 pm

      Thanks Henry.

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