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Lousy investor sentiment may mean better returns are coming

Consumer Reports News: August 09, 2011 02:23 PM

Every week, members of the American Association of Individual Investors (AAII) vote to indicate what their outlook is for stocks over the next six months. Predictably, the latest consensus, dated Aug. 3, was quite negative, with fully half of voters indicating that they're bearish on stocks in the next six months; on average bearish sentiment is only 30 percent. This is the most negative the indicator has been since July 2010. And given yesterday's market rout, next week's indicator may become even more negative.

We know: Everyone's gloomy. So what's the big deal? As it turns out, the AAII survey often has contrary indicative properties when sentiment is extreme. So when investors are heading for the exits, stocks post significant gains. When the bearish indicator exceeds 60 percent, stocks have posted significant gains in the 52 weeks that followed. Since 1987, this has occurred four times: twice during the first Gulf War in 1990; in October 2008, at the height of the credit crisis; and in March 2009, which was the start of a two-year bull market. The subsequent 52-week gains were 23, 26, 7, and 57 percent, respectively.

So keep an eye on this week's AAII number. If three out of five voters are bearish, take heart in knowing that not bailing on stocks might pay off in a year.

AAII Sentiment Survey [American Association of Individual Investors]

Chris Horymski

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