This Contrarian Indicator Should Be A Good Sign For Stocks. And Yet…

This Contrarian Indicator Should Be A Good Sign For Stocks. And Yet…
Stéphane Renevier, CFA

almost 2 years ago1 min

The AAII Sentiment Survey asks retail investors every week whether they’re bullish, bearish, or neutral on the short-term outlook of the stock market. And right now, the lowest proportion of participants in three decades are in bullish spirits.

Does that mean you should be worried? In theory, quite the opposite: retail sentiment has traditionally worked well as a contrarian indicator, with the most pessimistic sentiment often preceding a short-term stock market rebound. So the fact that retail sentiment is so low is an encouraging sign. In theory.

But one thing is worrying this time around: investor sentiment has deteriorated even as stocks have recovered from their March lows. In other words, investors are feeling less optimistic even as stock markets suggest they should be more so. So you might want to be a little more careful following the indicator this time around…

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