The American Association of Individual Investors (AAII) conducts a survey of its associates every week.
This survey takes place in an audience of non-professionals, it allows one to analyze the general market sentiment.
The poll of American Association of Individual Investors allows one to measure:
- The bullish propensity
- The bearish bias
- The neutrality of the survey participants
It is, therefore, possible to highlight both the percentage of bears and the percentage of the bulls.
It is likewise possible to view a bull/bear ratio, the ratio between the percentage of the bulls and that of bears.
The poll of the American Association of Individual Investors detects both the deviation from the previous week and also from the historical average (medium-term) view of the market.
How to interpret the American Association of Individual Investors poll
We must also interpret this indicator in a contrarian form. Much often, in fact, the public is on the wrong side of the market.
An excess of pessimism occurs usually at major lows on the equity markets.
The formation of a bottom is generally accompanied by a general sell-off, with small investors who liquidate their market positions.
Significantly, some analysts argue that it forms an important bottom (low) when “the last of the bulls have sold”.
This signifies that the bearish pressure is exhausted, and the market recovers. Certainly, the market is fueled by the entry of institutional investors who begin an accumulation process.
Moreover, an excess of optimism occurs often at the stock market highs.
The formation of a top often sees the entry in the market of many small investors who enter en masse, assuming a further rise in prices.
In conclusion, institutional investors use this situation to buy and execute a reversal.