How the AAII Sentiment Survey is pointing toward possible short-term market disruptions

In the playground, when all the kids jumped on one side of the teeter-totter, it rarely ended well. In investing, when all the investors move to one side of a trade, it can suggest that an uptick in market volatility is on the horizon.

In the chart, you can see the percentage of bearish investors hit its lowest level of the year in early October. The AAII Sentiment Survey asks members what direction they feel the stock market will go in the next six months. At this point, they all are clustered on one side of the teeter-totter.

To be fair, bearish sentiment has bounced between 22 percent and 32 percent for most of 2024. But when this type of sentiment indicator reaches an extreme, that’s when I take notice–especially during an election year.

The AAII Sentiment Survey is just one tool that I look at as I evaluate the financial markets. By no means does the survey influence long-term investment strategies, but it can play a role in influencing short-term decisions.

Bottom line: It’s best to anticipate a higher level of market volatility in the weeks ahead as the 2024 election season comes to a close. But remember, volatility is part of the investing process.

Market Insights

Stocks posted modest gains last week, with quarterly earnings season in full swing and the election on the horizon. The Standard & Poor’s 500 Index increased 0.85 percent, while the Nasdaq Composite Index rose 0.80 percent. The Dow Jones Industrial Average advanced 0.96 percent. The MSCI EAFE Index, which tracks developed overseas stock markets, fell 0.31 percent.

Stocks bolted out of the gate as the week began. The S&P 500 and the Dow Industrials hit record highs, with the Dow crossing 43,000 for the first time.

Midweek, news of stronger-than-expected retail sales report contributed to overall market momentum. Retail sales rose a seasonally adjusted 0.4 percent in September, topping economists forecasts.

As the week wrapped up, the technology sector helped fuel a rally that pushed the S&P and Nasdaq to another record high. It was the sixth straight week of gains for the S&P 500, Nasdaq, and Dow Industrials.

 

Source: YCharts.com, Oct. 19, 2024. Weekly performance is measured from Monday, Oct. 14, to Friday, Oct. 18.

TR = total return for the index, which includes any dividends as well as any other cash distributions during the period. Treasury note yield is expressed in basis points.

Insight from Corporate Reports

There were many market forces pushing each other around last week.

Corporate earnings reports drove much of the market action. Some of the most extensive financial stocks surprised on the upside, supporting a narrative that the economy remains strong.

At the same time, a corporate report from one of the world’s largest chip manufacturing contractors revealed continued strong global demand for AI microchips. However, increasing investor anxiety was a constant undertow in trading as the November elections drew nearer.

Source: The Wall Street Journal, Oct. 18, 2024