Emotional one-sidedness – is it a problem? | decision point

We regularly review our emotion charts, and today I’m featuring two. One is the results of a public opinion poll by the American Association of Individual Investors (AAII), and the other is the exposure level of the National Association of Active Investment Managers (NAAIM).

In both cases, sentiment is starting to tilt towards the bulls. That’s not surprising. Given the rebound from the October lows, investors should be optimistic. However, optimistic sentiments become problematic in extreme cases. The emotions are the opposite. If investors get too optimistic and get on the wagon, the wheels will eventually fall off. The reverse is also true when extreme bearish sentiment usually leads to higher prices. This is evident when we look at the major highs and lows in the market.

The Bull/Bear Ratio is what the AAII chart focuses on. Ratios are clearly weighing on the uptrend, but overbought levels may increase further.

The NAAIM Exposure Index shows high exposure figures. We would like to point out that while a strong bull market is in motion, as we saw in 2020-2021, these numbers are very overbought and may not lead to a downtrend. Please note that the problem occurred the last time the reading reached this level.

conclusion: The sentiment readings are lopsided in favor of the bulls. However, we note that these numbers can persist in a strong bull market move. Although this is likely to be the case right now, it is important to note that the current situation appears to be overbought on psychological indicators. It might be worth watching further.

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