Ordinary investors are getting giddy, judging by the latest American Association of Individual Investors (AAII) poll. The percentage of investors expecting stocks to rise over the next six months has climbed to 57 per cent.
That’s way above its historical average (38 per cent) and the most optimistic reading since January 2018, shortly before markets peaked following a rapid run-up. In contrast, only 20 per cent are bearish, the lowest reading in two years.
Excessively bullish sentiment does not mean a peak is near. Historically, extremely pessimistic readings have worked better as a contrarian signal.
Nevertheless, contrarians would prefer if investors were less euphoric right now, as extremely bullish AAII readings have historically been followed by below-average six- and 12-month returns.