Success in investing is sometimes as much about managing emotions as it is about the numbers. When markets “feel” terrible, our instincts often scream at us to either sell, or stay on the sidelines. However, markets have shown time and time again that moments when things “feel” the most pessimistic are often excellent tactical buying opportunities. Why is this the case? Because human emotion and biases often drive markets to irrational levels.
The timing of this blog post is no accident – as the market over recent weeks has had a noticeable uptick in volatility. This is primarily being driven by the ongoing narrative around “trade wars” and “tariffs” coming from the White House. As such, we wanted to share a little more about how we use investor sentiment as a guide for managing through periods like this.
The Data: What Investor Sentiment Tells Us
There are many “indicators” that attempt to track investor sentiment using data. Over the years, we have learned that using these indicators can add value when it comes to tactical (ie. shorter-term) decision-making. The idea behind most of these indicators is simple, and can be summarized by a famous quote by legendary investor Warren Buffet, “be fearful when others are greedy, and be greedy when others are fearful”. Keep reading for a brief overview of some of our favorite investor sentiment indicators – along with a look at current data for each.
1. AAII Sentiment Survey: The AAII Sentiment Survey is a widely followed weekly survey conducted by the American Association of Individual Investors (AAII). It measures the sentiment of individual investors by polling them about their anticipated direction of the stock market over the next six months.
Survey Components
AAII members are asked whether they are:
1. Bullish – Expecting stock prices to rise.
2. Bearish – Expecting stock prices to fall.
3. Neutral – Expecting little or no change.
The survey results are expressed as percentages of respondents in each category and are released every Thursday.
The most recent results of this survey (from February 26th, 2025) saw “Net Bearishness” (ie. the percentage of bullish investors minus the percentage of bearish investors) reach levels that have only been seen a few times in the past at -41.2%.
The table below expresses the 10 other “most bearish” results of the survey, the date at which they occurred, and the ensuing 3-month, 6-month, and 12-month S&P 500 market returns. In all cases but one, markets were higher over 6 and 12 months, with extremely strong average returns.
2. The S&P Oscillator: The S&P Oscillator is a short term measure of sentiment calculated using a proprietary formula. Generally speaking, when the oscillator reaches a reading of greater than +4 the market is considered “overbought”, and when it reaches a reading of less than -4 the market is considered “oversold”.
The idea behind this measure is to take the “opposite” position – ie. tactically reduce risk at overbought periods, and increase exposure at oversold periods.
As of this writing, the most recent reading (March 4th, 2025) has reached a “oversold” reading of -5.12 for the first time in 2025.
3. The CNN Fear & Greed Index: This index tracks seven data points (market momentum, stock price strength, stock price breadth, put and call options, junk bond demand, market volatility, and safe haven demand) to generate an overall “reading” on investor sentiment. Like the other measures, the index can be used to take the contrarian position when readings reach “extreme fear” or “extreme greed” levels, as these typically occur at or very near to points where markets reverse.
Once again taking data from March 4th, 2025 – the index has officials dipped into the “Extreme Fear” reading – reaching the lowest levels since August of 2024. As some may recall, 2024 was a stellar year for markets, and August of 2024 was the best intra-year buying opportunity (markets were dealing with spiking fears of recession at the time).
The Biases: Why We Forget the Obvious
Ask any investor during periods of relatively calm markets, and they will repeat the mantra of “buy low and sell high”. However, when it comes down to executing on this, emotions tend get in the way. Why?
Loss Aversion: The pain of losing is said to be twice as powerful as the joy of gaining, making us hesitant to buy when we should.
Recency Bias: We assume the recent downturn will continue indefinitely, ignoring history’s track record of proving this isn't the case.
Herd Mentality: We feel safer doing what others are doing, even if it means selling at the worst time.
Mitigating such biases allows for investors to better capitalize on subsequent positive market performance, as can be seen in the chart below. Remaining invested over the course of a calendar year has significantly elevated the probability of achieving better returns.
The S&P 500 has averaged a +12% annual return since 2015. However, if we remove the effect of being invested for the 10 best days in each of those same years, the average annual return drops to -10%:
The Opportunity: When Pain Leads to Gains
Historically, extreme fear doesn’t last. When sentiment reaches levels of negativity that we are currently seeing, the probabilities favor strong returns over the next 6-12 months as illustrated in the data above.
Final Thought: Lean Into Discomfort
When we speak to clients and other partners during periods of relatively strong markets, we often use historical charts to illustrate our viewpoints. Inevitably, when these charts are brought up, the various market drawdowns are pointed to and looked back on as “great buying opportunities” (late-2018, early-2020, and most of 2022 being the most recent examples). Yet time and time again when market volatility rises, not only do we not see investors taking advantage, but we also field inquiries about whether it is time to sell.
Investing isn’t about feeling comfortable in the moment, it is about making informed decisions, based on facts and historical precedence, that reward us over time. The next time fear takes over, remind yourself: history rewards those who move against the crowd.
Sincerely,
Di Iorio Wealth Management