• Trading 101: Contrarian Signal?

    by  • August 23, 2013 6:00 am • Trading 101 with Peter Bryans • 0 Comments

    The recent American Association of Individual Investors (AAII) poll came out yesterday, 8/22 and bullish sentiment dropped from 34.51% down to 28.96% . The S&P 500 is down merely ~3.5% from the 1,709 highs that were hit in early August. Sentiment is one thing that we closely pay attention to here at Schaeffer’s and right now we’re seeing six straight weeks where the bears have increased. This is the first time since 1987, that this has happened–according to Bespoke Investment Group. Below is the data showing the past survey results for the AAII Sentiment Poll.

    (courtesy of AAII)

    We took this study and looked at the data a little differently going back to 2010. We specifically wanted to isolate the data when the bearish sentiment was >40% and the bullish sentiment was also <30% and to then plot these points on the S&P 500. Neutral respondents would therefore be in the 30% or less range. Each signal line on the chart marks such instances. This study yielded some interesting results.

    Now, certainly not every signal was a “perfect” buying opportunity. However, note that the signal did mark some pretty key bottoms going back a few years. The lows in the late-Summer months of 2010 presented a good time to get long as did the same time about a year later. Finally, the most clear-cut buying opportunity was right before the big “Fiscal Cliff” drama at the end of 2012 where seemingly everyone was bearish and worried about the downfall of the market.

    Retail investors are notoriously bad market timers and when sentiment becomes overly bullish/bearish it can be a good signal to get either long/short. Remember that this AAII poll is just one way to measure sentiment. When the number of bearish respondents begins to tick up, perhaps it time to start paying attention. Another week that shows a drop in the bulls may just be a contrarian signal. We are, after all, only 60 points off of the all-time highs on the S&P 500.

    Good luck trading out there.


    Peter Bryans joined the Schaeffer's Investment Research trading team as a Trader in April, 2012. A graduate of the Fisher College of Business at The Ohio State University -- where he concentrated in Finance -- Peter previously held internships with an insurance broker and a wealth-management firm. In his current role, Peter trades a variety of our real-time option services and also hosts our "Options Apprentice" weekly webinar presentations.


    Leave a Reply