Contrary opinion is one of the best ways to make money in the market. Since the market cycles from top to bottom and back again, the trick is to sell when others are buying and to buy when others are selling. Sounds easy enough, huh?
One of my favorite tools for taking the pulse of investor sentiment is the American Association of Individual Investors (AAII)survey. The AAII is a nonprofit firm that seeks to educate the average investor. The firm surveys members on a weekly basis and publishes the findings. The investors are asked a simple question: Are you bullish or bearish on the direction of the market? Now, when an exceptional number of investors are bearish, then you know it is time to buy. Higher prices will follow. When an exceptional number of investors are bullish, then you know it is time to sell. Lower prices will follow. Its that simple.
Adviser Bernie Schaeffer has written that extremes in investor sentiment are shown by bullish readings over 50% and bullish readings below 25%. When the percentage of bulls ticks higher than 50%, that is actually bearish and should be taken as a good time to sell. Similarly, when the percentage of bulls ticks lower than 25%, then that is bullish and should be taken as a good time to buy.
The Las Vegas Investment Club took the buy signal on August 25 when the AAII survey showed a record number of investors were bearish. The bullish reading was 20.7%. That was our signal to buy when others were worried and selling. We made over 10% in our retirement account within 6 weeks.
What does the AAII survey say this weekend?
According to commentator Cullen Roche, "the latest AAII sentiment survey showed a 2.5 year high in bullish sentiment at 51.6%. This is the highest reading since May 8, 2008 and just shy of the all-time high in the S&P 500. Of course, the ensuing months were followed by a now legendary collapse in the markets."
There are too many bullish investors. It is time to leave the stock market for the moment. The signal to sell is strong. There is more money to be made fading the crowd and going in the opposite direction.
That's Contrary Opinion.
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