With the market rallying over 11.5% since the low on October 15, it isn’t surprising to see investor sentiment changing abruptly back to the bullish camp. However, what I saw last week when I got the AAII Sentiment Survey results caused me to shake my head.
The bullish percentage in the survey has jumped from 39% to 49.4% to 52.7% in the last two weeks. The bearish percentage has fallen from 30.5% to 21.1% to 15.1% at the same time. These drastic changes have caused the ratio of bulls to bears to jump from 1.28 to 2.34 to 3.49.
When the ratio jumped by more than one the previous week, it got my attention. When it jumped by one again last week, it caused me to start digging through the all of the data I have and that data goes back to July 24, 1987.
The first thing that jumped out at me is the bearish percentage of 15.1% is the lowest bearish reading since July 14, 2005. Looking at the chart of the S&P from that time period we see that the market peaked the following week and then proceeded to drop by 6.2% over the following 11 weeks.
After that finding, I set out to see how often the ratio jumps by more than one point in consecutive weeks. What I found is that this phenomenon has only happened on four previous occurrences—April 2000, November/December 1999, May 1996 and December 1992.
The occurrence in 2000 was an odd one as it came after the market had plunged by 10.5% during the week of April 10- April 14. Investors jumped right back in to stocks and the ratio jumped from 1.75 to 2.83 to 4.22 in consecutive weeks. The market went on to recover from that one-week debacle, but it took four and a half months and the market was unable to surpass the March high before it went into the bear market that lasted from August 2000 until early 2003.
Moving to the next occurrence, and moving from most recent to further back, we see that from November 18 through December 2, 1999, the ratio jumped from 2.09% to 3.24% to 4.77%.
The S&P rose 2.5% from the week ended December 3 through the week ended December 31, 1999. After rallying into the end of the year, the index proceeded to drop over 10% from the first week of January through the low in February 2000.
The occurrence prior to the one at the end of 1999 happened in May 1996. The ratio jumped from 1.61 to 3.64 to 6.10 from May 16 through May 30. It is worth noting that this is the only time in 27 years where the ratio jumped more than two points in consecutive weeks.
What we see after the occurrence is that the S&P peaked at 680.32 during the first week of June and then proceeded to drop to a low of 605.89 during the week of July 15-19. This represents a decline of 10.94% from the high to the low.
The final instance of the sentiment ratio jumping by more than one in consecutive weeks occurred from December 4 through December 18, 1992. The ratio jumped from 1.54 to 2.87 to 6.30.
The S&P peaked at 444.11 during the week of December 21 through December 24 and then fell 3.88% to a low during the first week full week of January 1993.
While we see that each instance of the sentiment ratio jumping so sharply has preceded a decline in the market, they haven’t all been the same in depth of decline or timeframe. Some have been immediate and some have been delayed by a few weeks, but the one that interest me the most is the one in 2000.
The reason this one intrigues me the most is because I feel the circumstances are the most similar to what we have now. We were in a bull market from December 1994 through August 2000 (five years and three months) and the S&P gained 238% during that stretch. We are currently in a bull market that started in March 2009 (five years and eight months) and the S&P has gained 206% during the run.
The one-week loss in April 2000 saw the market lose 10.5%. The recent three-week drop caused the S&P to lose 9.8%. The market bounced right back this time, but after the drop in 2000 it took several months for the index to recover.
It will be worth watching the AAII Sentiment Survey even more closely than usual in the weeks and months ahead. After the big jump back in 2000, the ratio dropped back down and then went in to a stagnant phase before the bear market started in August.
Good Info.