Last week the Rydex Ratio was displaying very bullish sentiment, and that is still the case. In rather stark contrast AAII Investor Sentiment* (American Association of Individual Investors) reflects very bearish sentiment this week, with 22% bulls and 42% bears. The ratio of bears to bulls is 0.53.
(Excerpt from the July 20, 2012 blog for Decision Point subscribers.)
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These are levels typically seen at market bottoms, not during price advances. Looking at the chart we can see that the percentage of bulls is much lower in the last three months than it was during the first quarter. And even though the market has been rallying for about seven weeks, confidence lost during the April-June decline has not rebounded at all.
The traditional interpretation of sentiment readings is contrarian, meaning that AAII Investor Sentiment is giving a bullish signal; however, we think we should also consider that investor confidence is lower than it ought to be in the context of a rally.
(*Sentiment data is provided courtesy of the American Association of Individual Investors (www.aaii.com). Polling is conducted on the AAII web site with a Wednesday cutoff and Thursday release.)
Images: Flickr (licence attribution)
About The Author
Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com
, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.