Latest news with #AAIIInvestorSentimentSurvey
Business Insider
a day ago
- Business
- Business Insider
Stocks are on the verge of flashing 2 big sell signals as investors pile into the market at a historic pace, BofA says
Things have been good for stocks over the last two months. Maybe too good, according to a new report from Bank of America. Since its most recent low on April 8, the S&P 500 and Vanguard's Total World Stock Index are up 20% as investors have piled into the market at a near-record pace. On an annualized basis, 2025 has seen the second-highest inflows into global stocks ever, trailing only 2024, BofA's Chief Investment Strategist Michael Hartnett said in a client note Friday. For US stocks, it's the third-highest year ever, after 2024 and 2021. Yet, amid the bullish frenzy, Hartnett said global stocks are approaching two sell signals. The first is the amount of money flowing into global stock funds. If they hit 1% of their current assets under management within a four-week span, the sell signal is activated. Over the last four weeks, flows totaled 0.9% of the funds' AUM. To hit 1%, flows would have to hit $30 billion in the "coming weeks," Hartnett said. The second is a breadth indicator that says when 88% of the ACWI countries' indexes trade above both their 50-day and 200-day moving averages, it's a sign that things are frothy and investors should sell, Hartnett said. Currently, 84% of ACWI countries' indexes are higher than their moving averages, meaning the market is in "overbought territory," Hartnett said. Both of Hartnett's sell indicators are in line with the conventional wisdom of contrarian investing espoused by legends like Warren Buffett. When the market is overwhelmingly bullish, good news is already priced in. When investors are bearish, it's an opportunity to buy stocks at a discount, the thinking goes. But sentiment gauges have sent mixed signals over the last couple of months. While inflows are strong, the AAII Investor Sentiment Survey shows investors are still net bearish. Bank of America's own Bull/Bear indicator shows the market's aggregate attitude hovers somewhere between optimism and pessimism, with a slight tilt toward the former. Breadth indicators are broadly in line with Hartnett's measure. Stocks of all stripes are doing well. Like Hartnett, Liz Ann Sonders, the chief investment strategist at Charles Schwab, said in a May 27 report that the robust breadth levels could be a cause for concern in the near-term. "Early-April setup was ripe for rally on good news given washed out sentiment/breadth and deeply oversold market," she wrote in a note co-authored with Kevin Gordon, a senior strategist at Schwab. "Setup now is not at opposite extreme." While breadth and sentiment can be contrarian indicators, it should be noted that the momentum factor has been king over the last decade and a half. What has done well (mega-cap tech stocks and popular indexes) has continued to do well, and steep declines in the broader market have generally been short-lived. That could still be the case going forward. Beyond technical indicators, investors are also monitoring fundamental measures of the economy's health. The macroeconomic picture remains unclear as business owners and consumers digest President Trump's tariffs. Concerns persist about how the import taxes will affect consumer prices and growth. The US economy added 139,000 jobs in May, more than economists expected, but the number wasn't a sure sign that the labor market remains solid, as April and March data were revised down. Long-term Treasury yields also continue to rise as Trump's tax bill fuels investor concerns around inflation and the US budget deficit. A negative catalyst in the form of rising unemployment or higher inflation could spark a reversal in the ultra-bullish signals Hartnett is watching.
Yahoo
26-04-2025
- Business
- Yahoo
Wall Street's Most Popular Investor Sentiment Survey Just Made Dubious History -- and It Has a Nearly 100% Success Rate of Forecasting Future Stock Returns
There are a lot of ways to invest your money, but none have generated a higher annualized return over the last century than stocks. However, this doesn't mean equities aren't without their inevitable ups and downs. Over the last two months, the ageless Dow Jones Industrial Average (DJINDICES: ^DJI), widely followed S&P 500 (SNPINDEX: ^GSPC), and growth-stock-focused Nasdaq Composite (NASDAQINDEX: ^IXIC) have all declined by a double-digit percentage. More specifically, as of the closing bell on April 21, the Dow, S&P 500, and Nasdaq Composite were 15.2%, 16.1%, and 21.3% below their respective all-time highs. This places the Dow and S&P 500 firmly in correction territory, with the Nasdaq falling into a bear market for the first time in three years. Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue » When Wall Street's major stock indexes tumble, it's perfectly normal for investors to seek out data points and predictive tools that have strongly correlated with directional moves higher or lower in the Dow, S&P 500, and Nasdaq throughout history. Even though these correlations offer no concrete guarantees, some have a perfect or near-perfect track record of forecasting future stock returns. Last week, one such Wall Street indicator made dubious history -- and it's actually great news for patient investors looking to take advantage of the stock market's recent sell-off. Stock market history being made has become somewhat commonplace in recent weeks. The benchmark S&P 500 logged its fifth largest two-day percentage decline since its inception earlier this month. Likewise, the Dow Jones, S&P 500, and Nasdaq Composite recorded their largest single-session point gains in their respective histories on April 9. Amid these wild swings, investor sentiment toward the stock market has been shaken to its core. Since June 1987, the American Association of Individual Investors (AAII) has released the results of a weekly survey that gauges forward-looking market sentiment. Rather than relying on backward-looking historical data, which AAII notes can result in hindsight bias, the AAII Investor Sentiment Survey offers insight into the minds of individual investors to gauge where they see the stock market heading over the coming six months. Over the last 38 years, sustained periods of bearishness -- defined as AAII Bearish Sentiment coming in above 50% -- have been exceptionally rare. As you can see in the post below on X from Bespoke Investment Group, which has aggregated data from the weekly AAII Investor Sentiment Survey, there were only six instances prior to 2025 where bearish sentiment was sustained for at least four consecutive weeks. The record for sustained bearishness among individual investors had been a seven-week period in September-October 1990, which was during the Persian Gulf War. It was eclipsed last week, with AAII Bearish Sentiment surpassing 50% for an eighth-consecutive week. The fuel behind this pessimism is undoubtedly the economic uncertainty caused by President Donald Trump's tariff policy. On April 2, which Trump referred to as America's "Liberation Day," the president unveiled a sweeping 10% global tariff, as well as a slate of higher "reciprocal tariffs" on countries that have historically run trade deficits with the U.S. These higher reciprocal tariffs were subsequently put on a 90-day pause on April 9 for all countries except China. While the president and his administration appear confident that tariffs will lead countries to the bargaining table and put America in a position of strength, there's a lot that could go wrong with Trump's tariff-driven approach. The obvious concern is that tariffs could harm the United States' existing trade relations with its allies and other key trade partners, such as China. It's possible anti-American sentiment in overseas markets can harm demand for U.S. goods, or at the very least spark retaliatory tariffs from other countries, including China. Additionally, the Trump administration doesn't appear to be differentiating between output and input tariffs. Output tariffs are placed on a finished good being imported into the country, while an input tariff is a duty placed on a component used to complete a product in the U.S. Input tariffs run the risk of increasing the prevailing rate of inflation domestically, and might make U.S. goods less price-competitive with those being brought into the country. To make matters worse, the Atlanta Federal Reserve's GDPNow model is forecasting the steepest organic contraction in the U.S. economy, excluding the COVID-19 pandemic years, since the tail-end of the Great Recession in 2009. There are tangible reasons for the AAII Investor Sentiment Survey to be making dubious history. But there's also a huge silver lining... One of Wall Street's odd quirks is that its darkest days tend to offer the best investment opportunities. Not only are some of its best single-day returns clustered near its largest single-day losses, but investment returns following periods of heightened bearishness tend to be well above the historic average. Including the present, there have been seven periods where AAII Bearish Sentiment lasted four or more weeks. Here's how the S&P 500 performed on a total return basis (including dividends) at the one-, three-, and five-year mark, respectively, following each prior instance (where applicable): Week ended Aug. 31, 1990 (4-week stretch): one-year total return (+26.9%), three-year total return (+57.8), five-year total return (+102.1%). Week ended Oct. 26, 1990 (7-week stretch): one year (+30.4%), three years (+67.1%), five years (+119.3%). Week ended Jan. 24, 2008 (4-week stretch): one year (-37%), three years (+2.2%), five years (+23.6%). Week ended July 17, 2008 (4-week stretch): one year (-23.4%), three years (+11.7%), five years (+49.1%). Week ended March 12, 2009 (4-week stretch): one year (+56.5%), three years (+94.4%), five years (+176.8%). Week ended Oct. 20, 2022 (5-week stretch): one year (+17.2%). One year later, the benchmark S&P 500 was higher on a total return basis 67% of the time, yielding an average return of 11.8%. Meanwhile, in the instances where three-year and five-year total returns can be measured, the S&P 500 was higher 100% of the time. The average three-year total return following a period of extended bearishness is 46.6%, while the average five-year total return is a blistering 94.2%. To put these figures into context, the average annual return for the S&P 500 over the long run has been closer to 10%. But following periods of excess individual investor bearishness, the benchmark index has been delivering a compound annual five-year growth rate of more than 14%. While short-term movements in the Dow, S&P 500, and Nasdaq Composite are likely to be volatile and unpredictable as President Trump's tariff policy evolves, historical correlations have accurately forecast higher future returns with a nearly 100% success rate. 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