Breaking Down Two Weekly Sentiment Polls

There has never been so much division as there is right now. I’m talking, of course, about the divergent attitudes between the weekly sentiment surveys conducted by Investors Intelligence (II) and the American Association of Individual Investors (AAII). The chart below shows the 10-week average of the percentage of bullish responses minus the percentage of bearish responses in each poll. So, the higher the line, the more optimism indicated in the poll.

These two lines have recently separated by their biggest margin ever. This week, I will go into the methodologies of these polls and who exactly they are polling. Then, I will quantify historical results to gain some insight to where the market may be heading.

Poll Methodologies

The two polls survey different investors. The II poll considers a collection of published investing newsletters. The editors at II determine whether the newsletters are bullish, bearish, or expecting a correction. According to their website, they review more than 100 newsletters. The AAII poll, on the other hand, is a simple survey of their members, asking them which direction they think the market will go in over the next six months. They can answer bullish, bearish, or neutral.

The different methodologies for the polls make the AAII poll much more volatile than the II poll. Newsletters which have been published are much more likely to hold on to their past view so that they are eventually proven correct. The AAII poll is an anonymous survey and responders are not held accountable for their views, so it is much easier to go from bullish to bearish, or vice versa.

Looking Forward

This chart makes clear that these two polls have never been so at odds. The orange line is the spread between the bulls minus bears figure from each chart (the orange and blue lines from the chart above). It is by far the highest it has been since 1988, the first full year of AAII data we have (we have II data back to 1963).

Recall, the difference from these charts is due the AAII survey showing an extreme amount of pessimism and the II poll showing a lot of optimism. First, let’s take these polls one at a time. The table below shows how the S&P 500 Index (SPX) has performed after the 10-week average of the bull-bear difference in the AAII poll was less than -10%. The second table is for comparison showing typical returns for the S&P 500 since 1988.

Stocks performed about as well after these pessimistic readings as they usually do. The average return and percentage of positive returns are similar in the two tables. What’s very different, however, is the amount of volatility. When the AAII poll showed a lot of pessimism, the standard deviation of returns was much higher than usual.

Now, I’m looking only at when the II poll is showing a lot of optimism, which is the case right now. Specifically, it’s when the 10-week difference in the bulls and bears is above 35%. In these cases, stocks have tended to slightly underperform as measured by the average return. Again, the big difference between these returns and what you would typically expect is in the amount of volatility. When the newsletters in the II poll are bullish, there has tended to be less volatility going forward.

Let’s look at what has happened when you combine these results. That is, when the AAII poll indicates pessimism and the II poll indicates optimism. Using the same levels as above (AAII difference is less than -10% and the II difference is above 35%) shows no results other than the recent ones, so I loosened the criteria. The AAII difference had to simply be negative while the II poll difference had to be above 25%. Doing this gives the results in the table below.

The table below suggests the worst possible environment for option traders. It’s a choppy, sideways, low-volatility slog with below average returns and lower than normal volatility. Hopefully, with the election coming up and the consistent surprises that 2020 has offered, there are some catalysts that make this time different.