Last week, $SPX made an uptrend high (1530). During the past few weeks, bullish sentiment as measured by AAII, II and NAAIM, has declined from their early February peaks. Many pundits have pointed to the declining number of bulls as a sign of further upside in price. Is it?
Historically, the answer is no. Bullish sentiment tends to peak ahead of price and then decline, making a negative divergence. Thus, the recent decline in bullish sentiment is consistent with the later stages of an uptrend. Bullish sentiment typically peaks when AAII is over 50%, II is over 35% and NAAIM is over 80%. AAII and NAAIM have recently exceeded those levels; II came close (32%).
The later stages of an uptrend are difficult. The trend is higher but becomes rounded as some investors become cautious ahead of others. Bottoms tend to be capitulative, with sentiment and price in sync.
Here are the charts:
The black arrows show the decline in bullish sentiment ahead of the peak in $SPX (green arrows). The first chart is for AAII (updated through February 22).
The same divergent pattern is present in NAAIM: