The American Association of Individual Investors (AAII) measure of small stock owner sentiment has just reached the most pessimistic levels in 33 months at the closing lows of this market correction to date. The last time the average investor was this Bearish occurred in early 2016 at the end of the global energy recession. An excellent time to Buy stocks. Investors tend to sell stocks most heavily at stock market bottoms and buy more near major peaks, making this a credible contrary opinion indicator. An AAII Bull (25%) minus Bear (47%) spread of 22% has been reached on rare occasions over the past 7 years and during Bull markets, this level seems to have a strong track record of signaling a stock market low is near. While we see the same economic and earnings clouds as many are now worried about in 2019, we are encouraged by the technical array of sentiment gauges warning that a market correction buying zone has been entered for at least the short term.
It’s encouraging that so many analysts, traders, and investors have become so pessimistic after 11 to 15% corrections in the major indices. The current AAII Bull – Bear spread of 22% would need over a 35% level if this was a Bear market and a negative outcome from the US and China Trade talks near December 2nd could trigger such a metric with a new wave of stock liquidation. However, any hint that there is a framework for compromise leading to a future trade deal will set off a strong equity rally phase in the weeks ahead. The meeting between Trump and China’s Xi should trigger a breakout move above SP 2720 or below 2600. The oversold sentiment indicators favor moving from a heavy cash position to more equity exposure, especially if there is one more 10% move lower in stocks on trade war fears.