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Sit Down: It's Time to Talk About This Survey

I have often scoffed at the American Association of Individual Investors’ weekly survey, but check this out.

The Market

You just know I am going to report that the indicators still haven’t changed. Because they haven’t. But there is one indicator we need to discuss: It is the American Association of Individual Investors’ weekly survey.

For at least 20 years I have followed this sentiment indicator and have often scoffed at it. The reason? There is nothing scientific about the polling. When we look at the Investor’s Intelligence data, which dates back to the 1960s, we know that they read the written reports of a set number of approximately 100 newsletter writers each week to determine if they are bullish or bearish. In other words, it’s not a survey where they ask, “Are you bullish or bearish?” But, rather, they have to have written down their thoughts and have subscribers who pay for those thoughts. That’s likely one reason they tend to be much slower moving and not nearly as jumpy as the AAII readings.

AAII has no set number who vote. Any AAII member can log on and vote bull or bear (or neutral). Some weeks you may have 300 people vote, while other weeks it may be not just a totally different number, but a totally different group of people who are voting. Then there is the timing of the vote. It closes for voting on Tuesday.

Do you recall how in March, when the market was tanking daily, this indicator showed very minor changes in bulls? I believe that is because during the decline we often rallied on Tuesday, thus keeping the bulls from getting too bearish.

This week we saw Tuesday down, and the second consecutive down day for the first time in April. So, while Thursday’s AAII readings showed more bearishness and less bullishness, which shouldn’t surprise anyone, the actual readings are to me, somewhat shocking. We ended with the fewest bulls for this entire cycle. Yes, the fewest at 25%. We could not even get 25% bulls in March, but now we have a mere 25%. Does that make sense to you?

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Then there are the bears, which jumped back to 50%.

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Let me state that I hate to rationalize an indicator, so I will not rationalize that this particular survey shows so much bearishness. But at the same time, I find it most useful when it is confirmed by other sentiment indicators and for that reason AAII is now the outlier, not being confirmed elsewhere.

For example, the put/call ratio is still not too low, but the reading of 88% is the lowest in a month and only the second reading under 90% in two months. That’s a minor change. The 10-day moving average is shown below. It is now hovering around 95%, which seems high, but remember it has come down from 130%.

New Ideas

The indicators have still not rolled over, but the Volatility Index is getting interesting to me. I often look for a pattern where it begins to curl under and that pattern has begun as the VIX makes higher lows the last two weeks. I think I am early on this call, meaning I think the rounding under could take another couple of weeks to complete, but it is worth paying attention to now.

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Today’s Indicator

The 10-day moving average of the put/call ratio is discussed above.

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Q&A/Reader’s Feedback

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Natural Gas Services (NGS) - Get Free Report could – should – try and get through this resistance and make a try for that resistance/gap overhead just over $7. If I am wrong, then that short- term uptrend line (currently around $4.50, but rising) breaking will tell me to get out.

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That breakout in Shopify (SHOP) - Get Free Report measured to the $625-$650 area, which means the stock ought to correct or digest from this point. Unless I see a pattern develop now, I have to stay away since it is up too much for me to like it, but hasn’t failed yet.

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Lam Research (LRCX:Nasdaq), which just reported, is like so many of the semis we have looked at: resistance overhead. It wouldn’t surprise me if it rallies again, or even several more times but it just feels like it will run smack into resistance if it does.

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Netflix (NFLX:Nasdaq), which also just reported, is not my kind of chart, because it is up so much already. The chart measures to the $470 area, so perhaps it flags here and rallies again. In fact if it can go sideways for a few weeks it could make that climb toward the target.

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I am not terribly inclined to bottom fish in most of these retailers, but I suppose American Eagle Outfitters (AEO) - Get Free Report should have an oversold rally. If it can get to $8, it would be a great place to sell it.

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