Technical Talk: Contrarian buy signal?

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The comments below were provided by Kevin Lane of Fusion IQ.

As seen in the chart below, the American Association of Individual Investors (AAII) equity allocation is currently 5% below its historical mean of 60%. Typically levels such as this suggest a fair amount of bearishness on the part of investors and com­mensurately a fair slug of cash on the sidelines. The more cash that builds up on the sidelines, the more likely intermediate-term lows can occur as the move to cash was in some part the selling pressure that caused the corrective wave.

Additionally, the buildup of cash is available liquidity to work back into the market and support higher prices. When we couple the below mean reading in the Asset Allocation Survey with a low number of bulls (only 20%) in the recent AAII Bull/Bear Survey it gives the backdrop of a strong contrarian buy signal, at least for the near to intermediate term.

While not a major low like 1990, 2002 and 2009 we would suggest this is a low that could provide a solid upside trading opportunity.

Source: Kevin Lane, Fusion IQ, September 1, 2010.


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2 comments to Technical Talk: Contrarian buy signal?

  • Peter Richman

    As John Hussman notes, the notion of money on the sidelines in a secondary market is a false one. When party A holds a security and sells it to Party B who is holding cash, party A will now hold that cash and Party B will hold the security. The change in cash on the sidelines is zero. Nonetheless, the bottoms and peaks of the graph are compelling as long term potential buy points. It is less clear where we are right now using this indicator to my eye (i.e. not clearly a bottom).

  • Frank W

    The key phrase here is “trading opportunity”. This market is so snakey that only a desperate trader or nitwit who still thinks that we are in a V-reversal would take a position. I give as an example the recent situation in which we were entering a reporting season. The market immediately began to descend. The reporting was something short of brilliant, while the market continued plumbing the depths on the basis of pure speculation that Spain would join Greece in falling over dead. Go for it if you dare!

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