Sentiment At Some Prior Equity Market Peaks

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Includes: BIBL, BXUB, BXUC, CHGX, CRF, DDM, DIA, DMRL, DOG, DUSA, DXD, EDOW, EEH, EPS, EQL, EQWS, ESGL, FEX, FWDD, GSEW, HUSV, IVV, IWL, IWM, JHML, JKD, OMFS, OTPIX, PMOM, PPLC, PSQ, QID-OLD, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RVRS, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPSM, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU-OLD, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, USA, USMC, USSD, USWD, UWM, VFINX, VOO, VTWO, VV, ZF
by: David I. Templeton, CFA

Not long ago, I was ask to compare current sentiment data provided by the American Association of Individual Investors with the market sentiment levels reached near the peak of the technology bubble. Going a little further, below is a chart showing the individual investor bull/bear spread near or going into the peak of the technology bubble and the peak reached just prior to the financial crisis.

As the above chart shows, the bull/bear spread pre-technology bubble was a wide 45 percentage points. In the lead-up to the financial crisis, the bull/bear spread equaled 26.5 percentage points. In this week's report from AAII, the bull/bear spread is only 12.5 percentage points.

The sentiment data is a contrarian measure and is most actionable at its extremes. Clearly, as the next chart below shows, the current bullishness level of 38.7% is far from an extreme level; in fact, the current bullishness level equals the long-run average reading for this measure.

During the technology bubble, when the bull/bear spread was at 45%, the bullishness level was a high 75%. Going back to 1987, this is the highest bullishness reading reported by AAII. Pre-financial crisis, the bullishness level in October of 2007 reached 55%. So currently, from a sentiment perspective, individual investors are at least indicating they are not overly bullish. Looking at sentiment in a vacuum, then, would indicate the market is not at a top. Of course, time will provide the answer, but investors do not seem overly exuberant.