This document shows that bearish sentiment among individual investors, as measured by the American Association of Individual Investors survey, reached high levels in 2002, 2004, 2005, and 2009. However, in each of those periods except 2009, the S&P 500 rose over the following six months, suggesting high bearish sentiment may predict future stock price increases. The JSCO Pain Index, which measures stock market volatility, is also relatively low currently.

1. AAII Bearish Sentiment Bearish Sentiment + 2 StdDev This week's bearish reading
Normal Bearish JSCO Pain Index (S&P weekly data) JSCO Pain Index 8 wk Avg
S&P 6 months forward performance
80.0% 50.0%
In 2002, 2004, and 2005, bearish
sentiment was nearly as high as it was in Maximum bearish
Bearish Sentiment and JSCO Pain Index
40.0%
70.0%
March 2009; share prices 6 months later sentiment in 21 years
(as indicated by the black dots), rose. 30.0%
S&P 6 mo. fws performance
60.0%
20.0%
50.0%
10.0%
40.0% 0.0%
-10.0%
30.0%
-20.0%
20.0%
-30.0%
10.0% Pain Index lowest
-40.0%
since June 2007
0.0% -50.0%
Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09
AAII bearish sentiment & JSCO pain index
Source: Jonathan Smith & Co. and AAII.
For education and discussion purposes only. This is neither investment advice
nor any offer or recommendation to buy or sell any security. Past
performance is not a guarantee of any investment performance.