Technical Talk: Contrarian buy signal?
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.
More on this topic (What's this?)
Sharp Decline In Investor Sentiment (Disciplined Approach to Investing, 7/2/15)
AAII Sentiment Survey Results for 11-18-09 (Chain Bridge Investing, 11/19/09)
Technical Talk: Individuals have below-average allocation to equities (Investment Postcards from Cape Town, 11/17/09)
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