Chart of the Day - Thursday, May 14th, 2020

4 week retail sentiment (AAII) now lowest since March 2009. Meaningful in a bull market, not in a bear market pic.twitter.com/ZeaEr6w25W

— ukarlewitz (@ukarlewitz) May 14, 2020

Today’s Chart of the Day was shared on Twitter by Urban Carmel (@ukarlwitz). It’s a chart of the S&P 500 over the past 20-years. The blue indicator in the lower pane is a 4-week moving average of the bull-bear spread from the weekly AAII Sentiment Survey. This indicator is at its lowest reading since March 2009, which tells us sentiment is extremely bearish right now. As we know, sentiment is often a contrarian indicator, especially at extremes. The fact that the bull-bear spread is at an extreme low (under -20) should be interpreted as bullish, right? Not so fast. Urban points out that during bull markets, extreme bearish sentiment readings (green vertical lines) are often a sign that the S&P 500 has put in a low. On the other hand, in bear markets, these signals are virtually meaningless, as shown by the red vertical lines. If we’re truly in a bear market regime here, using this popular sentiment gauge as a contrarian indicator is not all that useful.