Dec 4, 2023
Extreme bullish sentiment suggests caution: Larry Berman
By Larry Berman
Larry Berman's Market Outlook
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Are you bullish, bearish, or neutral? That is the simple question the American Association of Individual Investors (AAII) asks its members each week. In the past few weeks, sentiment has shifted dramatically to an increasingly bullish outlook. Sometimes, it’s the beginning of a new bull rally, but more often, it’s a signal of caution.
The main way we use the AAII data in our PRO-EYEs series of indicators is to look at the differential between investors that express a bullish view to those that express a bearish view. The green line in the chart below is that difference. The blue line is the statistical measurement (known as the Z score) that measures the current level relative to the historical mean in standard deviations. Readings near two or negative two represent caution and opportunity.
It’s rare for sentiment to turn so dramatically so quickly. It tells us that investor sentiment is highly charged and highly reactive. When the markets are moving on emotion rather than longer-term fundamentals, poor decision-making is likely. While no single indicator is a panacea, overall, there are more cautionary signals now than opportunities.
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