lystn

Hey everyone, Kirk here again at Option Alpha and welcome back to the daily call. On today's call, we are going to talk about the AAII sentiment survey, basically what is it and should you care about it, should you follow it. This is something actually I've known about for a long time. If you're in the investing space, undoubtedly, you’ve probably come across AAII which is the American Association of Individual Investors. They have a huge following. They’ve been around since basically I think the early 1980s. They’ve been basically publishing this reading on sentiment survey of all of their members and basically what happens is that each week, AAII asks all of their members this simple question. They do it through online surveys and polling and they remind people to do it. Obviously, you have to take that with a grain of salt that it’s only from one community, but it’s probably a good breath of indication because most people who are part of AAII are probably wealthy, probably have some money to spend or probably affluence and probably into their later years. Not in all cases, but it's not totally millennials who are here, nor is it the opposite end and everyone here is over 75. It’s probably a good representation of just a general investor in the market, someone who’s probably moving some money around. But each week, they ask their members a very simple question. “What do you feel is the direction of the stock market over the next six months? Will it be up, bullish, no change, neutral or down bearish?” And then people answer. And so, this reading or this sentiment indicator has been out now for a long time. They’ve got a lot of data on it and they continue to grow and increase the number of readings. This has helped us then, trying to figure out if this thing actually works. Now, they did a huge write-up on the sentiment survey as a contrarian indicator which you can look up online and definitely got to their website and check out. What’s actually cool about this and why I like this is because I'm the type of guy who wants to see the data for myself. I don’t want to trust a one sentiment indicator. I want to see, “Hey look. If we’re going to use that type of indicator, we got to overlap that indicator against the market to see if when people are bullish, does the market go up and when people are bearish, does the market go down.” That’s really what I want to understand. When it comes to figuring out if you should actually use this, I think there’s a couple of key takeaways. One is that the indicator usually was on one end of the extreme and stayed there until markets change. What I mean by this is that what they found in their research was that people tend to be just generally bullish until markets go down and then they’re bearish. It's not like this indicator is flip-flopping every single week or every single month. We don’t see people be bullish one month and then bearish the next and then bullish the next. It doesn't flip-flop. It tends to stay at one end of the extreme or another until major market shifts happen. That's helpful because if we see a reading of people being really bullish, that doesn’t really necessarily mean anything to us on the outside. If we see a reading of people being bearish and we’re in a bear market, it doesn’t really mean anything to us on outside. What I think is most important for this is that it acted as a contrarian indicator which we know is probably actually possible. It's not actually a surprise if you think about this. When everyone’s bullish, that’s probably a bad time to get into the markets. When everyone’s super bearish, it’s probably a bad time to start selling. It’s probably a good time to start buying. It’s probably a very simple concept, but we just all forget about it. Maybe we’ve forgotten about it over the last couple of years because we’ve been a super bull market. But when it was found to be a contrarian indicator is when the readings for bullishness or the readings for bearishness were two or three standard deviations above the average or the mean. What I mean by this is that if the reading for bearishness is say 50%, if we start to see that reading start to go two or three standard deviations above that where people are not just bullish, but just super bullish, like more than average, 75%, 80%, 90% of the people are bullish, we start to see those readings consistently at these larger tail ends, that is probably a better indication of the markets potentially turning or the markets stalling at those levels. Same thing on the bearish side. If we start to see people not just bearish, but super, super bearish, I mean, like overly perma-bear type bear people, then that’s when it might actually be a good time for the markets to rally. Again, they track this and they overlaid the time periods where people were super bearish or super bullish against what the market did and it actually ends up being a pretty good contrarian indicator. The way that I would use it moving forward and the way that I monitor this and watch this on my end… By no means do I watch this every single day, but it's something that I glance at maybe once a month if I see it because it always comes out and I have email updates on this or I see it on Finviz because they talk about it there. But whenever that happens where we start to get this insane level of bearishness or bullishness, that's when you might just heed some caution and take a closer look at maybe your portfolio. Ironically enough, at the time that this podcast is going out, we’re starting to approach that two standard deviation level for bullish readings. We’re starting to see people become uber-bullish on the market, probably no surprise because last year was a really good year for stocks. We’re starting to see people forget the past and not take into account maybe potentially the risk. The likelihood that we start to see the market fall as based on this indicator is probably a little bit higher now than it was before in the past, so again, take that with a grain of salt as you keep moving forward. As always, hopefully you guys enjoy these. If you have any comments or questions, let me know. I’d love to connect with you guys on Twitter, Facebook, Instagram, so look us up at Option Alpha and start a conversation. If you have questions, other topics you want to see on the daily call, let me know. I’m open to suggestions as always and it’s first come, first serve. Until next time, happy trading!