One thing to understand about sentiment measures is that they are contrarian. If investors are too bullish or too bearish, everyone has jumped on the bandwagon, and now it is time for the wheels to fall off.
Right now, we are seeing extraordinarily bearish sentiment coming out of the American Association of Individual Investors (AAII). We have well over 50% of participants bearish on the market. As you can see, that is a comparatively high reading, something we don’t see very often. This has brought the Bull/Bear Ratio down to 0.34 — that is extremely low!
So what does this mean? It means we may be arriving at an inflection point. You can see from past readings how the market does tend to turn back up when sentiment gets too bearish. Could this be what is setting up after the big declines that we’ve seen on the major indexes?
We do think that we’ll see some upside next week after Friday’s comeback rally and the fact that price is now sitting on important support and reversing. However, we don’t think that this pullback, almost correction, is over. There is still too much confusion and uncertainty over tariff talks and geopolitical concerns. The market hates uncertainty.
Conclusion: We have bearish extremes being hit on the AAII sentiment chart that does imply that we could see an upcoming rally. However, we don’t believe it will amount to much given the overall geopolitical environment. The market is still highly overvalued and that is a problem too.
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