AAII Neutral Investor Sentiment (record streaks) & 1988 similarities
Time to recap on the bag of mixed signals of 2015. Therefore please find the AAII-Neutral-Investor-Sentiment-readings of summer 2015 right here below:
As per 9th July 2015 the 14-week streak of neutral sentiment readings at or above 40% (readings above 39.6% are unusually high) was the first such streak since 8th July 1988 through October 21, 1988.
But the 16-week reading of Neutral Investor Sentiment recorded on the 23rd July 2015 was the highest of such a streak ever. Before that occurence the streak-record was set between 13th November 1987 and 4th March 1988 with a consecutive reading of 15 weeks. Please remember: neutral sentiment readings at or above 39.6% are unusually high. Finally the recent streak was lasting from 9th April 2015 onwards up till end of July 2015.
Historically, readings of Neutral sentiment at an unusually high level have been correlated with better-than-average market performance over the following six- and 12-month periods. (See "Analyzing the AAII Sentiment Survey Without Hindsight" in the June 2014 AAII Journal for more information, link will be given below). As there is and has never been any guarantee that history will repeat itself - unfortunatelly - the 6 months AFTER July 2015 did not result in stock-gains (recheck the S&P 500 ending the year 2015 at ca. 2.043 points)!
BUT if one re-evaluates the outcomes of the AAII-Survey (saying that >40% Neutral-readings lead to gains in the stock-index thereafter) one may still count on the 12month-horizon, which would lead to a potential gain of over 15% as per July 2016 (if stocks pick up even earlier - from January 2016 onward ? >> maybe even as per April or May 2016!). Summing up and counting away from an S&P-Index-level of ca. 2,060 - 2,090 in the period April 2015 to July 2015 one could calculate a possible 15% gain and arrive at a target of ca. 2,370 or 2,400 points as per Q2-2016 or July 2016.
Especially if one looks at the LATEST AAII-Survey results from 30th Dec. 2015 one may really believe in such possible outcomes. Last reading of Neutral-Inv.-Sentiment stood at 51.3%, up 9.2%-points from the week before!
As the survey officially states that if the Neutral-Inv.-Sentiment reading is +1 Standard Deviation above Average, the following 52-week Returns may be ca. + 15% (Average, Median). Ony may count up to 30th Dec. 2016 and would arrive at a closing level of ca. 2,349 points in the S&P 500 as per Year-End 2016.
Please read on your own ;-) >> Performance AFTER AAII-Neutral-Inv.-Sentiment readings > 40%: http://www.aaii.com
Combining Neutral-Investor-Sentiment readings > 40% with FED-Rate-Hike-Cycles: In this respect it is highly important to notice the Federal Reserve began a new rate-hiking cycle on 29th March 1988...(nice) coincidence...that the FED just started to raise the interest-rate after a looong period again just now in Dec. 2015...
To have a possible bluprint in mind and in order to have a strategy for a possible RISK-Scenario one may take a look at the S&P 500 Index and its performance/evolution in the period after the initial rate-hike-cycle starting in March 1988. Therefore follow the slope of the 200-day moving average in the first half of 1988. Similar to the previous historical examples, the stock market showed some erratic behavior in 1988, making no progress between January and June, and again between mid-June and early-December 1988.
The slopes of the 50-day and 200-day in December 1988 tell us the bias was bullish heading into 1989. Price action in 1988 also featured higher highs and higher lows in stocks.
The orange box shows a more difficult and indecisive market near the first Fed rate hike. Following the pattern of easier markets tend to follow harder markets, stocks rallied sharply within the context of more easy to discern trends in 1989. Those who executed well inside the orange box were rewarded for their perseverance.
To wrap up the whole-information-bag: The 9 months-period AFTER the initial FED-rate-hike was more or less up 'n down, but in the end more to the upside...the real "SUSTAINABLE upmove" started only 2 months after the new rate-hike cycle start (March 1988 + 2 months).