Extreme Bearish Sentiments?

Extreme Bearish Sentiments?

Investment sentiment indicators have moved into bearish readings as market indexes have fallen into correction, deep correction, and cyclical bear market territories. One of the more popular investment surveys is the American Association of Individual Investors (AAII). Each Wednesday, subscribers of AAII submit their responses as to whether they are bullish, neutral, or bearish on stocks for the next six months. The AAII survey has provided reliable sentiment readings of retail investors over the past 3.5-decades (the AAII survey began in July 1987).

For the week of 4/28/22, the AAII bullish camp fell to a low of 16.44%, or slightly higher than the previous week's reading of 15.84%. The AAII bearish camp surged to 59.36%, eclipsing the 2020 pandemic high of 52.07-52.66% (March-May 2020). The spread between the AAII bears and AAII bulls also plummeted to -42.92%, recording one of the lowest spread differential readings in the past decade.

The current AAII bearish sentiment (59.36%) conveys one of the most severe bearish readings in the past 35 years. There were only two other occurrences when AAII bears witnessed worse sentiments, during September 1990 (67%) and most recently toward the end of the 2007-2009 global financial crisis in March 2009 at 70.27%.

The current AAII bullish sentiment (16.44%) also shows a severe bullish reading. The reading has fallen below many of the lowest levels in recent years. Extreme lows occurred during November 1990 (-13%), August 1992 (14%), and March 2005 (16.48%).

The spread between the AAII bulls and the AAII bears, currently at -43%, is also one of the worst bearish spreads in the history of the AAII survey. Two occurrences when the spreads were worst were during September 1990 (-54%) and March 2009 (51.35%).

The current moves in retail sentiments have become so extreme that it implies two possible interpretations. One offers bullish market implications, while the other warns of dire market consequences.

One interpretation is the current AAII bulls and bears sentiment readings suggest the stock market decline is moving toward a selling climax or market capitulation phase like the one from March 2009 stock market bottom, which ended the brutal 2007-2009 global financial crisis. During 2008-2009, the bearish sentiments remained at heightened bearish readings (high-50s to the low-60s range) before finally succumbing to an all-time high of 70.27% during the week of 3/4/09. SPX Index finally achieved a climatic market bottom on 3/6/09 at 666.79 after suffering 512 days of a bear market decline.

The second interpretation offers bullish implications for the stock market. The current extreme sentiment readings are similar to 1990, 1992, and 2005. The AAII bullish sentiments plummeted to 13%, 14%, and 16.45%, while the AAII bearish sentiments skyrocketed to 67% (September 1990) and 70.27% (week of 3/4/09). In each of the above scenarios, the market sentiments signaled deep stock market corrections rather than the start of a structural bear trend.

Another interesting observation is the extreme negative sentiments did not lead to the onset of a structural stock market bear. However, the bearish sentiment reading during September 1990 coincided with an official 8-month US economic recession from July 1990 to March 1991. Further note, the all-time high bearish sentiment reading of 70.27% (3/4/09) signaled the end of December 2007 to June 2009 recession.

The key behind sentiment indicators such as the AAII surveys is their contrarian implications. Investors tend to be overly bullish at stock market tops and extremely bearish at market bottoms. In the majority of the cases, the extreme sentiment readings signaled pivotal stock market bottoms and tops. However, few occurrences, including the 2008-2009 stock market bear, warned of prolonged market turbulence and volatility.

The pertinent question remains – is this the end of another stock market correction or the start of a prolonged bear market?

Source: Chart courtesy of

Source: Chart courtesy of

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