I don’t know if you noticed, but for the third straight week the American Association of Individual Investors (AAII) survey showed more bears than bulls.
Three weeks in a row!
How does that even happen when the S&P 500, the Nasdaq-100, and the Dow Jones Industrial Average all just printed fresh 52-week highs?
And not just 52-week highs – new all-time weekly closing highs across the board.
Yet, despite stocks ripping higher, retail investors still don’t believe it.
Good.
Bearish Over the Next Six Months
The AAII’s weekly poll asks investors a simple question: Are you bullish, bearish, or neutral on stocks over the next six months?
For the past two weeks, bears have outnumbered bulls. You’d think with all the major indexes hitting fresh highs, sentiment might turn a little more optimistic.
Nope.
Instead, it’s wall-to-wall pessimism and grumpy investors:
Perfect.
This is the type of negativity we normally see during the earlier stages of bull markets.
By the time everyone gets bullish, it’s most likely too late.
They’re Bearish Small-Caps
One of the things I like about the AAII survey is how quickly it swings.
Individual investors are far more emotional than institutions – and you can see it play out in the data every week.
The fear, the greed, the panic, the euphoria… it’s all right there.
Another feature I like is the “special question” they tack on.
Last week’s was a good one: What kinds of stocks are you favoring right now – growth, dividends, small-caps, etc.?
The result? Only 3% said small-caps.
We’re picking up on this small-cap hatred in the “what are they doing” side of our sentiment work.
The “what are they saying” piece comes from surveys such as the AAII’s – investors telling us how they feel.
But the “what are they doing” side is far more revealing, and that comes straight from positioning data.
Right now, speculators are more net short small-caps than at any point in history.
Think about that: asset managers and hedge funds – more often the “dumb money,” particularly near extremes – have never leaned this heavily against the Russell 2000.
This Bloomberg chart has been making the rounds on trading desks all week. It tells the story pretty clearly:
Meanwhile, the commercial hedgers – the true “smart money” – are sitting on their biggest net long position ever.
And the so-called “professionals” – asset managers and hedge funds with a legendary knack for being wrong at extremes – are record short.
So no surprise here: I think they’ve got it backwards.
This is exactly where we want to be leaning in, owning small-caps while everyone else hides.
That’s what we’ve been doing in August – and it’s already paying off.
Smart money is buying. Speculators are short.
Whose side of history do you want to be on?
Stay sharp,
JC Parets, CMT
Founder, TrendLabs