What is the AAII Sentiment Survey?
The AAII Investor Sentiment Survey is a weekly survey of stock market sentiment amongst individual investors in the US. The survey is widely used as a contrarian indicator.
The American Association of Individual Investors is a nonprofit organization representing individual investors. It aims to educate and assist investors by providing education on stock market portfolios, financial planning and retirement accounts. Founded in 1978, the AAII has conducted the sentiment survey since 1987.
The AAII sentiment survey comprises a single question: What Direction Do AAII Members Feel The Stock Market Will Be In The Next 6 Months? Just three answers are possible: bullish, neutral or bearish.
Survey results are published weekly, and simply consist of the percentage of respondents that fall into each category.
How to interpret the AAII survey?
The AAII Investor Sentiment Survey provides three readings and is regarded as a contrarian indicator. The idea behind an indicator like this is that sentiment is bullish at market tops and bearish at market bottoms. When too many investors are bullish, a selloff becomes more likely, and when too many investors are bearish a rally becomes more likely.
Investors should consider all three levels, although individual readings also provide information.
The percentage for each category should be compared to its historical high, low and average level.
Bullish percentage – If the percentage of bullish responses is high, too many investors may be optimistic about the stock market. This implies that investors are already long, and there may be no more buyers to take prices higher.
Neutral percentage – If the percentage of neutral responses is high it suggests a high level of uncertainty amongst investors. This also implies that investors are building up cash, which increases buying power for the future. Alternatively, a low percentage of neutral responses indicates that investors are more certain about the direction of the stock market and are positioned accordingly. This can lead to large moves in the index if a new trend develops in either direction.
Bearish percentage – If the percentage of bearish responses is high, there may be too many bearish investors. This implies that investors have already reduced exposure and are ready to start buying again.
What are the current AAII Sentiment Survey levels?
For the week ending 26 January 2022, the sentiment levels are:
- Bullish: 23.1%
- Neutral: 23.9%
- Bearish: 52.9%
Bearish sentiment is the highest it has been in eight years, while bullish sentiment has risen slightly from an 18-month low recorded the previous week.
The following are the historical averages, lowest and highest reading, and standard deviation ranges for each response. This data is for the 1987 to 2022 period.
| Average | Lowest | Highest | 1 Std Deviation Range | 2 Std Deviation Range | |
|---|---|---|---|---|---|
| Bullish | 38% | 12% | 75% | 28 to 48% | 18 to 58% |
| Neutral | 31.4% | 7.7% | 62% | 23 to 39% | 15 to 48% |
| Bearish | 30.6% | 6% | 70% | 21 to 40% | 11 to 50% |
What are the useful AAII levels for investing?
Bullish response percentage
The bullish response percentage can forecast positive and negative price movements.
- Bullish readings below 20% are quite reliable at predicting strong returns.
- Bullish readings above 50% usually precede low positive returns, but can also lead to substantial corrections and bear markets. High bullish readings should be considered a sign that bullish momentum is slowing and may reverse sharply.
Neutral response percentage
The neutral response percentage can estimate the magnitude and direction of future price movements.
- Low neutral readings (below 20%) often result in increased volatility with larger than normal price movements in both directions.
- High neutral ratings (above 50%) usually lead to gains for the stock market.
Bearish response percentage
The bearish response percentage is most useful when it suggests positive price movements in the future.
- Bearish readings above 40% typically lead to higher returns for the index, though larger than average declines can still occur.
- Low bearish readings have little predictive value
How to use the AAII Sentiment Survey
Like most contrarian indicators, the AAII sentiment indicator is most useful when readings reach extreme levels. Any reading that is close to two standard deviations above or below the long-term average is worth paying attention to.
When you identify an extreme bullish or bearish response level, you can also consider the percentage of neutral responses to estimate how investors may be positioned and whether they may have large cash balances.
This indicator should not be used in isolation. An extreme level may be reached some time before the market makes a top or bottom. You will need to use other indicators like moving averages, volume, and volatility for confirmation and timing.
While this indicator can assist in forecasting, it is especially useful for managing exposure and risk. Exposure can be reduced when sentiment reaches bullish extremes, and increased when bearish extremes are reached.
What are the limitations of the AAII indicator?
The AAII Sentiment Survey reflects the views of individual investors and can give us a good idea of how they are positioned. It doesn’t reflect the views of professional investors and analysts – so it really only shows us what one group of investors think. It also doesn’t account for the catalysts that may lead to a change of trend.
The AAII sentiment levels are likely to reach extremes some time before a trend change occurs. This is particularly true in prolonged bull markets when prices can continue to rise for months or years after a high percentage of bullish responses is reached.
This indicator can forecast what may happen – but not what will happen. It needs to be used alongside other indicators for timing and confirmation.
Is the AAII Sentiment Survey a reliable indicator?
This indicator is very useful when considering what may happen next in the stock market, but isn’t always reliable as a standalone indicator. It is very useful when used with other tools and indicators.
We suggest using this indicator along with our complete list of 12- essential market indicators to make educated financial decisions. These metrics include:
