SeekingDelta of http://seekingdelta.wordpress.com

“Be fearful when others are greedy and greedy when others are fearful” ~Warren Buffett

The NAAIM (active money managers) survey for this week showed a sizable increase in bullish sentiment while the AAII (individual investors) survey showed a decrease in bullish sentiment. This week, with both sentiment surveys near[1]or higher than one standard deviation above their historical averages we will look at a warning from past surveys.


The NAAIM survey started in July of 2006 so we have four and a half years of data or 233 weekly surveys. In these 233 surveys there are only five times – including this week – where the NAAIM survey was above the current level and the AAII survey bullish sentiment was above 50%. See the table below:

naaim sentiment survey and returns of the s&p 500
click to enlarge

As can be seen when both sentiment surveys hit these levels in 2006, the market was able to rally for another year culminating with the all-time, nominal S&P 500 high in October of 2007. The two 2007 occurrences both resulted in one year declines. Over two years, all four occurrences resulted in a decline in the S&P 500 of over 30%! This is admittedly a small sample size and the market is currently not valued as richly as the other occurrences – as evidenced by the CAPE in table above – but it is a warning nonetheless worth considering. FYI – The current CAPE of 22.7 is well above the post-1900 average of 16.3.

This week, active managers have, on average, a 74.7% allocation to equities. This is up from 63% last week. The median allocation rose to 90% while the top quartile of active managers have an allocation of 100% or greater to equities with the bottom quartile up to a 73% or less equity exposure. The eight week moving average is now at 66%.

naaim sentiment survey and returns of the s&p 500
click to enlarge

The NAAIM number measures current equity exposure (0% would be all cash, 100% fully invested). Additional detail can be found here.

Individual investor’s bullish sentiment decreased slightly to 50% this week from 53% in the prior week. Bearish sentiment rose to 27% from last week’s reading of 23%. The Bull-Bear spread is at 23%, well above the series average of 9%. The eight week moving average of bullish sentiment increased to 50%.

aaii data
click to enlarge
aaii data
click to enlarge

Individual investor sentiment is in the “extreme” territory; measured as one standard deviation above average. Active manager sentiment is just below the “extreme” level which is 75%.

For analysis of the subsequent equity returns based on sentiment surveys please see the flowing links. AAII research here and NAAIM research here.


17.  [1] The NAAIM survey is at 74.7% with 75% being one standard deviation above the historical average.