Chart & Description courtesy of marketgauge.com

..."The opinions and actions of individual investors are reputed to be a good contrary indicator. This reputation is based on the theory that the public is the "last to know." Hence, when the majority of the public is too bullish or bearish it is an indicator that the market is vulnerable to change.

Calculation & Significant Levels

American Association of Individual Investors (AAII) Index Ratio:
A ratio based on a weekly survey of hundreds of individual investors. The survey calculates the percentage of respondents who claim to be bullish, bearish or neutral. The AAII Index Ratio is calculated by dividing the percentage of bullish investors by the sum of bullish and bearish investors. A reading greater than 70% is considered bearish, and a result lower than 30% is bullish.

Formula:

(percentage of bullish investors)
------------------------------------------------------------
(percentage of bullish investors)+(percentage of bearish investors)

Strategy
Unlike some indicators, the significance of the AAII Index Ratio increases as it rises above 70% or falls below 30%. Historically, sentiment readings over 70% have been timely predictors of corrections in an up trend. Higher peaks in this indicator may suggest a longer or larger correction is due.

Sentiment readings of under 30% in a weak market indicate a level of fear and capitulation by individual investors which is common at market lows. In severe bear markets such as in 1990, sentiment can stay low for months. The duration and degree of pessimism in this case was an indication that the ensuing bull move would be large."...










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