Wile E. Coyote, Genius

Posted by barkand on December 26, 2010 under Cartoons, Market sentiment | Be the First to Comment

Four months ago, on August 26, the American Association of Individual Investors (AAII) published the results of their latest survey of investors. That survey found that only 20.74% of their members were bullish on the stock market while nearly half, 49.47%, were bearish. You can see on the chart below, that the market hit bottom at that point and has gone up almost in a straight line since then.

Now, after a 20% gain, investors are much, much more bullish. According to the most recent AAII survey, over 63% of AAII members are now bullish on the stock market, compared to only 16% bearish. The numbers have not reached this extreme point in several years, and already some are calling for a market top based on this euphoric survey. But I think they should consult with Wile E. Coyote first. Excessive bullishness does not mark turns in the market as well as excessive bearishness.

You see, when Wile E. Coyote falls to Earth, he feels the pain immediately. But when he first runs off the edge of a cliff, he always manages to stay airborne for longer than you ever expect. From May of 2003 through January of 2004, the same AAII survey was frequently reporting strong bullishness among investors. Their survey published on June 26, 2003 found 71.4% bulls! But traders who reacted to that number, fearing the market had become too optimistic, got burned. On the 10-year chart of the S&P500 below, you see that extreme optimism did not coincide with a top in the market.