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Are the Bulls back in Town?

According to the Investor Sentiment Survey, which is produced by the American Association of Individual Investors, current market sentiment now favors the bulls over the bears. This is the first time that this has occurred since March 31st, 2022. The most recent survey, produced on February 8th, indicated that 37.5% of investors were bullish on the market, 25% were bearish, and 37.5% were neutral.

The Investor Sentiment Survey dates back to 1987. Historically, bullish sentiment has averaged 37.5%, which is what the survey showed last week. Surprisingly, the 37.5% bullish reading is the largest since December 30th, 2021. So, bottom line, maybe “the bulls are back in town.”

It is important to point out that the sentiment survey is seen as a “contrarian” indicator. In other words, investors typically feel more bullish near peaks, and more bearish near low points. During the bear market that began last year, that was largely true.

The chart below shows the percentage of both bullish and bearish investors at various peaks and troughs. You can see at the troughs, bearish sentiment was very high, while at peaks, bullish sentiment would rise. Now, bullish sentiment has surpassed bearish sentiment, and now has the highest reading since December of 2021. Bearish sentiment is also at its lowest reading since November of 2021. Although this survey is generally considered a contrarian indicator, this reading comes at a time when the market appears to have broken out of its downward stairstep pattern. In other words, this is the most positive investors have felt about the markets since the bear market began last year.

Source: chart created using Optuma Technical Analysis Software. Investor Sentiment Survey data provided by AAII website.

Bottom Line

Markets are driven by the law of supply & demand, which is in turn driven by the emotions and beliefs of investors. As the sentiment survey showed, people tend to feel more pessimistic near a low point, and a higher level of optimism near a high point. The markets will do what most would least expect.

This is the first time in a long time where investor sentiment favors the bulls. Even though investor sentiment is typically a countertrend indicator, keep in mind that bullish sentiment is nowhere near an excessive level that would indicate there is “too much” optimism. Bullish sentiment right now is just at its historical average. Bearish sentiment was very high all throughout last year, sometimes exceeding 50% or more. Based on what we know today, this is a positive development. It doesn’t mean these characteristics will still be in place next week or in six months, but for right now, maybe the bulls are back in town.


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