AAII

Investor education, newsletter provider
AAII
Investor Education, newsletter provider
Contributor since: 2010
Company: American Association of Individual Investors
jprizzuto - The article has been edited. Bullish sentiment historical average is 39%. June 18 was the 15th consecutive week that bullish sentiment was below this number. Thank you, and we apologize for the error.
Here is an analysis of the survey results we did a few months ago:
http://bit.ly/V1UDlM
It will take several years of future data to determine if the correlation between high and low readings and market direction holds up or is severed.
GoatWing,
I referenced an article with an analysis of how the market has performed following high and low sentiment readings. You can see it at http://bit.ly/V1UDlM
-Charles
Miguel/Slowly Learning - Will health care be the best performing sector over the next 10-20 years? Nobody knows, and those who say they do know, don't. As I said in the article, I avoid making big bets on uncertain outcomes.
Teach English-The rules may differ depending on the 403(b) plan. Vanguard has told me several times that admiral funds are off limits.
Jrez-The per fund exists even if we get electronic delivery of our statements.
-Charles
We average about 300 respondents to the Sentiment Survey.
Dancing Diva,
It is important to consider the prevailing yields at the time you are investing. If a stock's yield is considerably higher than the prevailing range for most quality stocks, then questions should be asked. Specifically, why is X stock yielding so much? What risks are other investors demanding compensation for.
In the current environment, yields above 3.5% on quality stocks are hard to fine.
-Charles
mfsjss,
Model S priced at $62k after federal tax rebate - Telsa website: http://bit.ly/uVaZUY
Consensus earnings estimates don't show a profit being made until 2014 - Yahoo! Finance - http://yhoo.it/ZiR9db
The Recusant,
The June AAII Journal will discuss the survey's response rates and how it has performed historically as a contrarian indicator.
-Charles
Dollars withdrawn from dividends are shares that could have been purchased, which would have paid additional dividends. Either way, money is coming out of the portfolio.
SDS,
Howard did not publish a list of the companies. Rather, he just sent me the numbers on how many companies have declared dividends, both regular and special.
-Charles
The two are not contradictory statements. Weak technicals are a sign something is wrong, but when everybody is fearful that the market is a in a freefall, buying opportunities often exist.
Table 2 has been updated. I incorrectly sorted the stocks when the article was first published, from high to low P/Es, when it should have been from low to high P/Es. Sorry for the confusion.
As far as the comments, anchoring is a very common error among investors of all skill levels--and it is very important to be aware of it.
Just look at all of the current chatter about Facebook. Yes, the stock is now $6 below its offering price, but it is still very expensive on a valuation basis. But, how much do you hear about the stock's P/E ratio?
So is the article simple, yes? But, it's underlying point is very important.
-Charles Rotblut
AAII
K202,
It should have read, "This is also the seventh consecutive week that bullish sentiment has been below its historical average of 39%."
Unfortunately, the typo slipped by both me and my editors. I've asked Seeking Alpha to correct.
Sorry for the confusion,
Charles
Pietrusikim,
We have not announced the location yet. We'll probably make an announcement near the end of this year or early next year.
-Charles
Thanks Shanky.
Hi,
Thanks for being a member.
It is a small percentage of total membership and we do not use random sampling for the surveys, so there are those caveats that must be considered when looking at the survey results. Nonetheless, there is a long history (which can be downloaded at AAII.com) to compare the current results against.
As far as the ICI mutual fund flow data, they measure the fund flows for 95% of all mutual funds. Thus, the data includes both individual and institutional inflows and outflows.
Our surveys provide insight, but I do not recommend using them as the sole indicator for judging market direction. Rather, I would look at several indicators before making a judgment as to whether stocks are looking more or less attractive.
Hope this helps,
Charles
Kenji,
I purposely left covered calls out of the article, because most of members (but certainly not all) do not use options. As to your comment about risk, a covered call strategy still leaves you exposed to a big drop in a common stock's price. Though covered-calls do provide some income, the post-transaction and post-tax profit may not be to provide much a cushion. (And yes, I realize this statement depends on several factors.)
-Charles
AAII
Regarding MLPs, my understanding is that does not matter if the IRA is a traditional or an Roth, the UBTI rules apply the same. Here is what the National Association of Publicly Traded Partnerships says on the issue:
There is a concept in the tax code (I.R.C. §§511-514) called “unrelated business income tax” (UBIT). Under the UBIT rules, tax-exempt institutions and retirement accounts must pay tax on income from a business that is not related to their exempt purpose (a university operating a business that had nothing to do with education would be an example).
Because of the pass-through nature of an MLP--or any partnership (no tax paid by the partnership, all tax items flow through to the limited partners/shareholders, who pay tax on their share), the shareholders are treated by the tax code as if they are directly earning the MLP’s income. Thus, as a shareholder in the MLP, the IRA, 401(k), or other account is considered to be “earning” its share of the MLP’s business income.
The tax is owed on the retirement account's share of the MLP’s taxable business income, minus its share of depreciation and other deductions related to the business, as reported on the K-1, (not on the quarterly distributions). There is a deduction that covers the first $1,000 of unrelated business income from all sources; after that, the retirement account will owe tax.
It is important to remember that you are not the one who will owe any unrelated business income tax on MLP units held in your retirement account. The tax is owed by the IRA, 401(k), or other account itself. It is the responsibility of the custodian of the account to file a tax return (form 990, the return for tax-exempt organizations) and pay any tax owed out of the account’s funds.
You should also note that the tax applies only to the income allocated to the retirement account each year while it holds the MLP units. It does not affect the treatment of capital gain realized when the units are sold. This would remain exempt from taxation.
Regarding MLPs, Robert Carlson of Retirement Watch.com addressed the subject in the March 2010 AAII Journal:
"Investors are most likely to be trapped by UBTI when an interest in a pass-through business entity (partnership, S corporation, or limited liability company) is held in an IRA. The IRA’s share of a pass-through entity’s income is considered UBTI regardless of the account holder’s ownership percentage of the entity. Pass-through entities generally do not pay federal income taxes. Instead, their income and expenses are passed through to their owners’ income tax returns.
"This rule most often trips up individuals who invest their IRAs in master limited partnerships (MLPs)—such as pipeline partnerships—or real estate partnerships. Master limited partnerships are traded on major stock exchanges, and many people think of them as being the same as corporate stock. In fact, these are limited partnership units, and the income and expenses of the partnerships pass through to the owners at tax time. When distributions from master limited partnerships to an IRA exceed $1,000, taxes are due on that income.
"Individuals generally are urged not to purchase master limited partnerships through IRAs. Unlike collectibles, investments in MLPs and other pass-through entities can be held in an IRA. However, the ownership triggers the UBTI tax and the requirement to possibly file a version of Form 990 and pay estimated taxes.
"When an IRA does own master limited partnerships and earns income of more than $1,000 for the year, some tax advisers recommend taking the easier and cheaper route of reporting any IRA-owned pass-through income on the IRA owner’s individual tax return instead of preparing a separate return for the IRA."
Geoffrey - Thanks for the clarification on the preferreds.
-Charles
AAII
We don't publish the number, but we have yet to find any difference between the number of responses and whether sentiment improves or decline.
There have been correlations between our weekly sentiment survey and market reversals when bullish or bearish readings reach very levels. Like any indicator, however, it needs to be used with other signals.
There is no single timing indicator that will tell you when to get in and get out.
-Charles Rotblut
AAII
Thanks for the running the numbers. The analysis is similar to what we've seen in other studies, which show a correlation between extreme bullish and bearish readings and market turning points.
As you mentioned, our survey should be used in conjunction with other indicators.
-Charles Rotblut
AAII
tweedn - Thanks for the kind words. I personally prefer dividends over buybacks as well, though buybacks are preferable to bad business ventures and they do provide greater flexibility for a company undergoing strong growth.
AAII members can download a spreadsheet with the all of the survey's historical data and a chart plotting the data against the S&P 500. (Membership is just $29 per year.)
Since the survey is conducted weekly, there are a lot of data points and therefore the Excel chart gets messy. What we have found is that over time, extremes in the sentiment readings are correlated with market reversals. There is no single magic indicator, however, and the sentiment numbers should be considered within the broad context of other factors.
Steve - just call or email me anytime you need investment data, quality fantasy football advice or someone to boost viewership of the Zacks’ videos and TV show. :)
Stone Fox Capital - Our sentiment survey is conducted weekly and I believe the mutual fund data is tabulated monthly, so it would not be an exact overlay of data. I've never seen a study trying to combine the two, but I know some researchers have done long-term studies using our survey data.
-Charles Rotblut, AAII
Larry,
The scenario of low inflation and slow growth, but not deflation is based on what many economists are currently projecting. As to whether they are being too optimistic or too pessimistic is for each investor to determine.
I'm not making a forecast, just presenting the data and giving investors factors to consider should the U.S. continue experiencing such an environment.
-Charles
Thanks for the feedback.
As I said in the article, this is not a call for history to repeat itself - I acknowledged that the conditions are different now, but rather simply evidence that Japan is not the only scenario we could be looking at in terms of slow growth and low inflation.
The survey is conducted online at AAII.com. Without checking IP addresses, we have no way of knowing if it is the same members taking the survey week and week out. What we have found over time, however, is that the responses provide a pretty good overview of how our members feel about the market.
I would caution against using any indicator as the sole reason to be bullish or bearish. Rather, you want to look at a variety of indicators before forming your opinion.
Steve,
I would caution against using any single indicator, whether its our sentiment survey numbers or something else, as your basis for trading. Always make sure you are getting similar signals from a variety of indicators.
You may well be doing this already and if so, just consider this a friendly reminder.
-Charles
Bearish readings above 50%, which roughly equate to two standard deviations from the mean, do not occur very often and thus draw attention. Like any indicator, however, it needs to be placed in the broader context. Specifically, do many indicators suggest that the potential rewards outweigh the potential risks?
Obviously, the great debate comes in determining which indicators. I lean heavily on fundamental indicators, though I do look at the chart before making a final decision. Others flip this priority. The key is to know what you are buying and what could cause your analysis to be wrong before you place the actual order.
Hi Jeff,
Only AAII Members are allowed to participate in the survey. We have approximately 125,000 members.
-Charles