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Survey Says...No Fear


Last Friday, I said that there were several data points that concerned me - things that suggested speculation was so frothy that it usually portended at least a short-term pullback in equities. To the collection of "complete lack of fear" readings, we can add the sentiment survey from the American Association of Individual Investors (AAII). Their latest poll came out this week with a scant 10% of the respondents saying they are bearish on the market's prospects over the next six months.

The percentage of bears in this survey has been this low or lower only six other times in its history, going back to 1987. Looking at those other instances, one week later the S&P was lower 4 times, with an average loss of 1.9% (and a largest loss of 4.7% and biggest gain of 0.6%). Six weeks later, the S&P was lower 5 out of the 6 times, with an average loss of 3.3% (and a largest loss of 8.0% and biggest gain of a mere 0.4%).

Obviously, with only six samples we can't be too confident in the ability of this data to accurately predict the future from a statistical sense. But combined with multi-year low volatility levels, small-trader emphasis on call options (the CBOE reported over 1,000,000 equity call options traded yesterday) and near-complete disregard for put protection, and the overbought condition of the broader market, I am very concerned about the potential for unexpected events to have an unwelcome effect on the market over the next few weeks. I know this seems a bit like Chicken Little with the market hitting new highs this morning, but those who are unaware of the risks are most likely to suffer from them.
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