AAII Bearish Tilt Could Be a Reliable Contrarian Indicator

Core Viewpoint - The S&P 500 Index (SPX) is reaching new highs, yet the American Association of Individual Investors (AAII) shows a bearish sentiment among its members, which is often viewed as a contrarian indicator [1][2]. Group 1: Market Sentiment - The AAII survey indicates a negative bulls minus bears line, suggesting a higher percentage of bearish responses compared to bullish ones [2]. - The latest reading of the AAII 4-week average was -9.4%, moving out of a previous reading below -10% [3][6]. Group 2: Historical Performance - Historical data from AAII reports since 1990 shows that low readings of the bulls minus bears indicator correlate with strong SPX performance, particularly when readings are below -10% [4]. - When AAII members are most bearish, the SPX has an average return of 7.4% and a median return of 9% over the next six months [7]. - Conversely, when AAII members are most bullish, the SPX performs poorly, with an average return of 3.3% and a median of 4.2% [7]. Group 3: Potential Upside - The data suggests that extreme bearish sentiment among AAII members presents significant upside potential for the SPX, with average positive returns in double digits when the bulls minus bears average is negative [7].