Investor Survey Says: Bet Oppositely

by Jonathan Cheng

When the American Association of Individual Investors' weekly gauge of sentiment hits the tape early Thursday, much of Wall Street will be ready to pore over the numbers.

"It's the first thing I check—I look at it every week, and I think it's very, very important," says Keith Springer, head of Springer Financial Advisors in Sacramento, Calif. Like Mr. Springer, John Buckingham, chief investment officer at Al Frank Asset Management and publisher of its widely read Prudent Speculator newsletter, calls the survey one of his favorite measures of investor sentiment.

The association releases the results of its Internet survey—which asks AAII members to register their bullish, bearish or neutral views on the stock market—early each Thursday. Over the past two decades, it has proved a compelling contrarian indicator: If the reading is overly bearish, for instance, it is often a sign the market will rally.

What Mr. Springer and few on Wall Street know is that the survey's sample size is typically so small, and its methodology so fraught with holes, as to render it statistically worthless.

Just 200 to 300 investors respond each week, less than 0.2% of the association's 150,000 dues-paying members, according to the Chicago-based group, which doesn't publish the sample size. Among them are a large number of retirees, the AAII says—giving this tiny slice of the investing community an unusual amount of sway over Wall Street.

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From a strict, statistical perspective, the AAII's survey is "pretty much useless," said David Madigan, professor and head of the Department of Statistics at Columbia University, who is particularly troubled by survey's reliance on voluntary self-reporting.

"The thing you worry about is the bias of the people who volunteer. The concern is, why would someone choose to respond to this?" Prof. Madigan says. "If you were using it to make statements about how the general membership feels, then you're on really shaky ground. But maybe the opinions of the 200 who are motivated enough to respond is predictive of what the markets are going to do."

And despite its formidable statistical limitations, the survey has been surprisingly useful as a marker of turning points, especially market bottoms.

"It's almost like clockwork," said Al Frank's Mr. Buckingham. "The reaction is immediate and it's fascinating."

For instance, on March 5, 2009, the AAII survey registered its lowest bullish reading in 17 years. Days later, the Dow Jones Industrial Average embarked on a 13-month bull run that sent it up more than 80%. This year, in late August, bearishness jumped to its highest point of the past five months, just as the Dow began a 14% rally.

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Alan Zafran, partner of Menlo Park, Calif.-based Luminous Capital, which manages $3.8 billion of assets, says fellow hedge-fund managers told him they dumped some of their positions after a Nov. 11 reading this year showed bullishness spiking to a near four-year high. The market fell 3% over the next five days.

Birinyi Associates has been following the survey for years, using the difference, or spread, between the bulls and the bears as an indicator of where the market may head. Birinyi uses a four-week moving average. The results are noteworthy: On the 16 occasions since the early 1990s that bears have outnumbered bulls by at least 10%, the Standard & Poor's 500 has gone on to rally an average 6.2% gain over the next six months.

And when optimism gets too frothy, and bulls outnumber bears by at least 30%, the S&P 500 has tended to fall over the next six months, according to Birinyi. The current run of bullishness hasn't gone that far yet, but the numbers are quickly approaching those levels.

This Thursday, the reading will command extra interest because the survey has registered an unusually resilient run of 13 consecutive weeks of above-average bullish readings.

Last week, the reading showed 49.66% of respondents were bullish, up from 47.40% a week earlier, well above the long-term average of 39%. While bearishness also increased—to 26.21% from 24.68%—the gap between the camps had widened.

"When we see bearishness or bullishness get too extreme, it's generally been correlated with a market turnaround," said Charles Rotblut, vice president of the AAII.

Still, he said he has been surprised by how often the survey is cited in the investment community, chalking up its popularity to its publicly available track record over 23 years and its history of signaling market tops and bottoms.

The AAII is one of many market indicators that rely on the responses of volunteers. And Wall Street traders have other measures of market sentiment, including the ratio of option puts to calls, fund-flow data and the CBOE Market Volatility Index. Others also look to a survey of investment newsletter-writers, compiled by Investors Intelligence.

Mr. Rotblut cautioned that the AAII survey does have limits. His attempts to juice participation among AAII members hasn't helped increase responses, leaving Mr. Rotblut to conclude it is largely the same small circle of members that logs in each week to vote. (In the pre-Internet age, members mailed in postcards each week.)

"You still have to look at several market indicators and not just look at ours as the sole thing you're looking at," Mr. Rotblut said. "Sometimes with consumer-confidence surveys, they say they're worried about the economy, but then they go and buy a flat-screen TV."

Write to Jonathan Cheng at


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