Running of the Bulls: Is the "Dumb Money" Catching On?

Investors breathed a collective sigh of relief when Greece tentatively accepted a bailout from its EU partners. And the market meltdown in China appears to have run its course… at least for now.

So with the end of the world postponed for the time being, the market’s been rallying. Yet among individual investors, bulls seem hard to come by.

According to the latest American Association of Individual Investors (AAII) Sentiment Survey, there are fewer bulls today than at any time since the 2008 meltdown:

American Association of Individual Investors Sentiment Survey Bullish 8-Week Moving Average

The AAII survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months.

To smooth out the noise a little, I used an 8-week moving average. And as you can see, bullishness is currently at lows you might normally associate with panic bottoms.

The weekly reading shows that just 27.9% of individual investors are bullish about the market over the next six months. To give a little perspective, the long-term average bullishness reading is 38.8%.

While it has become cliché to call this “the most hated bull market in history,” at least by this metric it would seem like an accurate statement.

Many view the AAII Sentiment Survey as a contrarian indicator. Investors are only human, and it’s natural for them to get skittish and sell after a good market correction – when the smart institutional money is busy buying. It’s also natural for them to aggressively buy after the market has had a good run – when the smart institutional money is selling and taking profits.

It’s odd to see bearishness among individual investors today because we haven’t really had a big correction. And interestingly, the negative sentiment doesn’t seem to match their actual portfolio allocation.

As John Del Vecchio noted last week, their allocation to stocks is a little on the high side at 67%. I would read this as investors timidly putting money into stocks for a lack of anywhere else to put it.

Like most measures that depend on investor psychology, the AAII survey is noisy and doesn’t always give clear signals. But the takeaway here is that the bull market probably has a little longer to run.

Yes, stocks are very expensive at these levels and probably won’t offer much in the way of returnrns over the next eight to ten years. And I agree with John that stocks are a terrible long-term bet at today’s levels. But that doesn’t mean the market can’t continue to drift higher for the next several months.