Individual Investors Laughing All the Way to the Bank

THURSDAY, MAY 10, 2012 AT 04:46PM

Individual investors are often ridiculed as being the last to get into the market and the last to get out.  However, looking at trends in bullish sentiment suggests that individual investors may not be the dopes that many institutional investors often classify them as.  In this week's survey of bullish sentiment from the American Association of Individual Investors (AAII), bullish sentiment dropped from 35.4% down to 25.4%.  This puts bullish sentiment at the lowest level since September.

Looking at the chart below shows that bullish sentiment on the part of individual investors has been declining since February or about six weeks before the S&P 500 reached its peak.  If this was just a one-time event, we could probably chalk up the decline in bullish sentiment ahead of the market peak as a coincidence.  The reality, however, is that last year we saw the exact same pattern as bullish sentiment also declined ahead of the big drop in equities.  The fact that individual investors have shown such good timing twice in a row now suggests that they deserve more credit than many have been giving them credit for.  Perhaps they could even lend a hand to the Chief Investment Office of JP Morgan (JPM).