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For the past few weeks, the weekly survey of the American Association of Individual Investors (AAII) has offered unique insights into emotions and investor sentiment. To say the least, individual investors are nervous.

Every week since 1987, AAII conducts a survey. There’s just one question in the survey: Are you bullish, bearish or neutral about the next six months? The results provide useful insights into the current market environment.

Over the long run, investor sentiment tends to be more bullish than bearish. This can be seen in the long-term average of the results. In a typical week, 38% of individuals are bullish, while less than 31% are bearish. Typically, almost a third are neutral and have no strong feelings either way.

Over the past month, we’ve seen a swing to a bearish extreme followed by a reversal to a bullish extreme.

AAII Sentiment Survey Results

aii sentiment survey

Source: AAII.

In just two weeks, sentiment shifted more than 21%. That’s an unusually bullish shift.

The survey has been completed 1,784 times. A shift like the one we saw in the past two weeks has occurred just 24 times.

Analysts Misjudge Individual Investor Sentiment

Usually, analysts scoff at the ability of individuals to time the market. They assume this group of investors will be wrong and interpret the data in a contrary manner. With so many bulls appearing recently, the contrarian approach sees that as a bearish indicator.

I view indicators through the lens of the data. Rather than assuming anything about what this means, I tested it. I found that the S&P 500 was higher about 60% of the time after this scenario. Over the next month, the average gain was three times the average gain in a typical month.

That makes sense. Individuals in this survey are likely to back their opinions with money. There are now bulls rushing into the market. This survey shows the average individual is now optimistic about the stock market, and their buying should push prices up.

Michael Carr is the editor of True Options Masters, One Trade, Peak Velocity Trader and Precision Profits. He teaches technical analysis and quantitative technical analysis at the New York Institute of Finance. Follow him on Twitter @MichaelCarrGuru.

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