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Bearish Enough for a Market Bottom?

The fact that stocks and bonds have been selling off in tandem suggests there may not be a place for investors to hide during the recent market downturn. It also warns that market sentiments have turned decisively bearish over the past few months.

Are investors bearish enough to substantiate a market bottom?

One of the primary objectives of sentiment surveys is to identify extreme market conditions associated with stock market tops and bottoms. Tops occur when anyone that wants to buy has already bought into the market, resulting in excessively bullish sentiments and a saturated market poised for a market selloff. Bottoms develop when anyone that wants to sell has sold into the market, resulting in extreme bearish conditions, and capitulated market that sets the stage for a market rally.

Many investor sentiment surveys and polls tend to be subjective and open to various interpretations. Investors are humans and, as such, are influenced by fear, greed, and different levels of emotions. The sentiment readings may not accurately identify the exact saturation point of extreme bullishness or bearishness. Others believe sentiment studies are crucial to understanding behavioral finance and market psychology. Carefully studying the inherent biases in the marketplace allows astute investors to exploit market opportunities.

Some sentiment surveys have mixed results in picking stock market tops or bottoms. Non-emotional polls such as AAII monthly asset allocation survey on stocks, bonds, cash positions, and Rydex Ratio that tracks money flows in bear funds, money market funds, and bull funds may be better at recording excessively bullish and bearish conditions associated with market tops and bottoms. After all, the money flows statistics in the AAII asset allocation survey and flow of funds from the bull/bear/cash funds represent real money at work in the marketplace.

AAII Investors Sentiment Survey

The bulls/bears retail investors sentiment survey for the week ending on 5/4/22 shows the bulls at 26.9%, neutral at 20.3%, and bears at 52.9%. The readings show an uptick from two weeks ago (4/13/22) when the bulls declined to 15.8%, neutral at 35.7%, and bears at 48.9%. Since 1987 or the start of the sentiment survey, the average for the bulls is 38.0%, neutral is 31.5%, and bears are 30.5%. The all-time high bulls are 75% (week ending on 1/6/00), and the all-time low bears are 12% (11/16/90). The high neutral readings are 62% (6/3/88), and the low neutral reading is 7.69% (6/19/02). The high bear number is 70.27% (3/5/09), and the low bear number is 6.00% (8/21/87).

Based on the current AAII sentiment readings, many individual investors expect the stock market to decline or stay relatively unchanged over the next six months. Although the sentiments remain decisively bearish, they are not trading at extreme levels comparable to the past. The question remains - AII bull and bear sentiment readings need to approach the extremes before a market bottom?

AAII Asset Allocation Survey

The Asset Allocation survey for April 2022 shows stocks and stock funds allocation at 69.8%, bonds and bond funds allocation at 12.6%, and cash allocation at 17.6%. The historical average for stocks/stock funds is 61%, bonds/bond funds are 16%, and cash is 23%. The highest stocks/stock funds allocation is 77% (Jan 2000), and the lowest is 40.8% (Mar 2009). The highest bond/bond funds allocation is 25.5% (May 2010), and the lowest is 6.9% (Nov 2000). The highest cash allocation is 44.8% (Mar 2009), and the lowest is 11% (Mar 1998).

For Apr 2022, individual investors’ equity allocations rose to an uncomfortably high level for the 12th time in the past 14 months. The fixed-income allocation also fell to the lower end of their typical historical range, warning of increasing bearish sentiments. The cash allocation is also noteworthy as cash increases for the fifth consecutive month while fixed-income allocations drop to a 14-year low.

The tightening of monetary policy, rising inflation, and the historically low-interest rates contributed to investors selling bonds and increased cash. Are AAII individual’s stock allocations headed toward the extreme levels of past stock market selloffs?

Are retail investors taking a longer-term investment approach and are reluctant to substantially change their high stock and low bond/cash allocation? If stocks continue to a selloff, will the stock/bond/cash allocations begin to change and move quickly toward levels of the two prior market tops (2000-2002 bubble or 2007-2009 global financial crisis)?

Rydex Ratio and National Association of Active Investment Managers (NAAIM) Exposure Index

The Rydex Ratio represents bear/money market funds divided by bull funds. The lower the ratio, the more bullish the investors. Conversely, the higher the ratio, the more bearish the investors.

The recent Rydex Ratio shows investors have switched out of bull/sector funds and into cash positions (money markets). However, the increased inflows into bear funds are not close to the 2020 pandemic-induced bear market. Interestingly, the current flows into bull funds are different from that toward the end of the 2020 bear.

The NAAIM Exposure Index also shows money managers are less exposed to the stock market near the end of the 2020 bear market.


The above studies strongly suggest investors are bearish. However, the AAII Asset Allocation survey, Rydex money flows, and the NAAIM Exposure Index readings are not at extremes. A temporary and short-lived stock market bottom may appear over the near term. However, a solid and sustainable market bottom will develop when sellers have capitulated.

Source: Chart courtesy of and

Source: Chart courtesy of and

Source: Chart courtesy of

Source: Chart courtesy of

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