Birinyi has been tracking this survey for many years, using the difference between optimists and pessimists as an indicator of market direction, especially using a four-week moving average, and the results are very significant: since the early 1990s, on 16 different occasions, whenever the number of pessimists exceeded the number of optimists by at least 10%, the S&P 500 index rose an average of 6.2% in the following six months. When optimism becomes too frothy and the number of optimists exceeds the number of pessimists by at least 30%, the S&P 500 index usually falls in the following six months.
In addition to the AAII survey, Wall Street traders have other ways to analyze market sentiment, including option put-call ratios, fund flow data, the CBOE Volatility Index, etc. In addition, there is a sentiment survey of investment newsletter writers hosted by Investors Intelligence.
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Mr. Rotblut, vice chairman of the American Association of Individual Investors, reminded everyone that the association’s survey does have flaws. “You have to look at more market indicators and can’t rely on just one survey. Sometimes in consumer confidence surveys, respondents say they are worried about the economic outlook, but then go out and buy a flat-screen TV.”
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