"Good news is bad news."

If you've never invested a cent in your life, this phrase will sound asinine—and rightly so. It's like saying down is up, left is right, or it's dark out when the sun is clearly up.

But as you become more familiar with financial markets, you'll find that this phrase is both apt and common, because of what it really means.

"Good news [about something] is bad news [for the market]."

And conversely …

"Bad news [about something] is good news [for the market]."

In fact, if you have to deal with this insanity long enough, you'll have a little chuckle when someone points out that "good news is actually good news this time around."

And that brings us to the topic of our Weekend Tea today: the AAII Sentiment Survey, where up is down and down is up.

Sometimes.

The Tea

In trying to assess where the market is going to go next, analysts, fund managers, and other experts look at a wide array of hard data from the government, corporations, and elsewhere.

But from time to time, they also listen to regular Joes like you and me.

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The American Association of Individual Investors (AAII) is a nonprofit that helps individuals effectively manage their own assets through education, information, and research. Its roughly 150,000 members don't have any specific credentials—they're merely people who have signed up with AAII or one of their stock picking services.

And one of their most noteworthy contributions is the AAII Sentiment Survey. Per AAII:

The AAII Sentiment Survey offers insight into the opinions of individual investors by asking them their thoughts on where the market is heading in the next six months and has been doing so since 1987. This market sentiment data is compiled and depicted below for individual use. Investor sentiment is measured with a weekly survey conducted from Thursday at 12:01 a.m. until Wednesday at 11:59 p.m. Tracking sentiment gives investors a forward-looking perspective of the market instead of relying on historical data, which tends to result in hindsight bias.

The results come out every week in an easy-to-read chart, like this entry for the week ending Jan. 15, 2025:

Source: AAII Investor Sentiment Survey | AAII

Very briefly, what you're seeing is that right now, AAII members are both much less bullish than they tend to be, and much more bearish.

You might think, at first glance, that this report would bode poorly for the market. But as this week's guest is about to explain, the opposite is true.

The Take

This week, we sat down with Larry Tentarelli, Founder and Chief Technical Strategist of Blue Chip Daily Trend Report, to understand why investors should care about the AAII Sentiment Survey, and why it's a chief example of when "bad news is good news."

Young and the Invested: If the stock market is supposedly about profits, valuations, dollars and cents, why are we asking investors about how they feel? 

Larry Tentarelli: I think the biggest reason is that people often do tend to invest based on their emotions. I think it dates back to Peter Lynch, who used to run Fidelity Magellan Fund (FMAGX). He always said we should invest in what we know—if you like to wear a certain brand of sneaker, or drink a certain brand of soda, invest in those companies. So I think people tend to invest off of their emotions—if they feel optimistic about a certain stock, or if they feel pessimistic about the way the economy looks. Maybe it should be about the dollars and cents, but I think at the heart of it, it's really an emotional process.

Young and the Invested: In the AAII's most recent report, bullish sentiment came in 12.1 percentage points below the historical bullish average, and bearishness came in 9.6 percentage points above the historical bearish average. In other words, investor sentiment was bearish. Explain to our readers why you reached out to us to tell us this is a bullish indicator.

Tentarelli: It's interesting because the AAII website itself has an entire page dedicated to the fact that you should consider their survey as a contrarian indicator. They've found that, over time, at the extremes, when the survey comes in extremely bearish—like it just did—historically that happens near a low point in the market. And by the same token, when the survey comes in bullish, historically, that's a shorter-term high point. 

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I say "shorter-term because if we go back to 1987, there haven't been too many major market tops. It's a long-term uptrend. You have occasional bear markets—2000, 2008, 2020, 2022—but over the course of time, the market tends to trend higher.

Young and the Invested: Why do you think, practically speaking, it plays out this way? Why do market bottoms tend to come when sentiment is low, and vice versa?

Tentarelli: I think a lot of it is human nature and recency bias. If you go onto CNBC or ABC News or whatever, you see big headlines—"the Dow is down 1,000 points today" or whatever the headlines are. When the markets pull back and they see negative headlines, they think, "This bad news is going to continue!" By the same token, when the market's hitting all-time highs, people see the positive headlines and think, "Everything is great! The market will keep going up forever!"

Over time, the market trends up. However, the way it actually plays out is, the market goes up, then it pulls back, then it goes up some more—but when it pulls back, it tends to pull back less than the amount it went up. For example, if the stock market goes up 10% over the course of, let's say, six or seven months, it will usually backfill maybe half of that move, so a pullback of 5%. Going back to 1950, the S&P 500 averages just more than one 10% pullback every year, and three 5% pullbacks every year. 

I think institutions tend to play the averages. When they see a 5% pullback they say, "OK, this is a good place for me to put some money to work, buy the dip." Then we get a few good days, and the average person sees it and thinks, "OK, some other people have bought this dip, maybe I'll do a little buying," and this starts to build on itself.

That's what we're seeing right now. If you look at the S&P 500 right now, it's up 1.1% today, up 3% on the week, which is a really big move—that's one of the best weeks over the past year. So we're actually seeing this play out right now.

The data from this survey was conducted from members between last Thursday (Jan. 9) and this Wednesday (Jan. 15). So that big bearish survey came in basically right in time for the S&P 500 to go up by 3%.

Young and the Invested: Is it ever a good thing for the AAII survey to be bullish?

Pentarelli: I tend to only look at the extremes. What I mean is, AAII has a range in their survey—they say the bullish average is 37.5% and the bearish average is 31.0%. In my research service, I look at the survey every week, but I only really pay attention to it when it hits the extreme. So if the average bullishness is, let's say, 37%, and we get a week where bullishness is, say, 50%, 51%, 52%, any really big outlier to the upside tells me that we're probably due for some type of short-term pullback in the market. And going the other way, when I see a big bear reading like the recent one, I believe we're probably due for a bounce. 

But unless it's an extreme, I don't pay too much attention to it.

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We had a double positive signal on Wednesday in that bullishness came in 12 points below the average and bearishness was [more than] 9 points above the average, so that looked like a really good signal, and it seems to be playing out right now. The S&P 500 has been higher in four of five days this week, and today, 82% of the stocks in the S&P 500 are higher right now, so it has been a very bullish week.

Young and the Invested: Can you explain to our readers why that kind of "breadth" in winners is favorable?

Pentarelli: I don't just look at the index, but how many stocks in the index are going up and going down. I like to see very positive breadth because, if I see most of the stocks in the index going up, that tends to be bullish because it tells me that fund managers and institutions are buying up stocks and putting their money to work across the board. When we get very weak breadth—like at the end of December, when we had days where only about 20% of stocks were going up—then that tells me fund managers are not very optimistic right now.

Young and the Invested: Lastly, is there anywhere you can go to view AAII sentiment data over time, or is what you see at the AAII Sentiment Survey page really all you need?

Pentarelli: I just tend to look at the weekly survey. On their website, if you're a member, you can download the historical data going back to 1987 and they'll show you on a year-by-year basis what the high and lows were for sentiments. But I think realistically, your readers could really just look at the free survey that gets posted every week to determine whether the reading is relevant or not.

Note: All mentions of market returns and levels within the interview were as of 11 a.m. Friday, Jan. 17, unless otherwise indicated.

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A reminder to readers: Sentiment indicators, economic reports, and technical signals are among a variety of factors that more active investors and traders monitor. But take care—indicators and signals, while useful, are far from perfect, and trading based on them can be risky. Meanwhile, truly long-term buy-and-holders don't need to worry much about these reports, other than to expand their investing knowledge and get a better understanding of why and when the market does what it does.

Riley & Kyle

Young and the Invested

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