Breakout

Investor sentiment suggests a big move is coming

Jeff Macke
Breakout

Market volatility has made doubters of us all. The American Association of Individual Investors survey for the week ending May 7th showed 28.3% ‘bulls,’ 28.7% ‘bears’ and a whopping 43% of respondants ‘neutral.’ It’s the highest level of neutrality in more than 10 years.

It takes quite a bit to convince individual investors to not have an opinion about the market but that’s what the last two months have managed to do. “The market is just grinding,” says optionMONSTER’s Jon Najarian in the attached clip. “It’s been very easy to be in the wrong individual stocks.”

Case in point for Najarian is Twitter (TWTR) which he started buying on the way down, defying his own discipline and incurring a loss prior to a much-needed bounce (which came in shortly after this segment was taped). “The people that can’t decide, the ‘meh’ crowd, that’s probably been the right decision.”

As for the market as a whole history suggests a sharp move follows peaks in neutral sentiment. Going back to 2005 AAII neutral sentiment has pushed to 38 on 4 distinct prior occasions (August 2013, December 2011, November 2010 and December 2011). Looking at the S&P 500 (^GSPC) a month later showed greater than 4% moves each time over the subsequent 30 days.

Unfortunately for traders the back-test doesn’t give a clear sign. Three of the 1-month moves were up with one sharp drop. Still it’s a safe bet that American investors aren’t going to stay neutral for long. Look for Mr. Market to knock people into the bullish or bearish camps in short order.

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