While most investors focus solely on the company they invest in a lot of other factors come into play in making a succesful investment. Two of those factors are supply and demand. At its most basic element a stock or market rises when there is more demand and it falls when there is more supply. Thus, while an investor can invest in a seemingly good company, market sell-offs and increased selling pressure can adversely affect even the most bullet-proof stock or portfolio.
Given this backdrop, we thought it would be a good time with the recent market volatility to examine supply and demand by looking at investor allocations and sentiment surveys. The American Associatioon of Individual Investors (AAII) captures both these data sets. Below we look at the first data point, which is Individual Investor Equity Allocations deviation from its mean. In this chart we look at how far investors have deviated from their 27 year mean equity allocation to determine if investors have a lot of cash on the sideline (potential demand) or a little cash on the sideline (potential supply).
As illustrated below, investors tend to get over-invested (see the 2000 internet bubble top) and under-invested (1991, 2002, & 2009). These periods of over-investment/under-investment tend to leave investors with either little to no avaialble cash to push stocks higher, or lots of cash to come in and add demand. Presently investors are a over-invested in stocks relative to thier hsitoric averages, which means there is likely more supply than demand at the moment in the broad market.
American Assoc. of Individual Investors (AAII) - Equity Allocation Mean Deviation - Monthly Chart
In our second chart below we look at a different way to gauge investor liquidty, through the AAII Investor Sentiment Bull/Bear Survey. The theory is when surveyed investors respond they are bullish on the state of equity markets they are talking based on how their portfolio are positioned. For example, someone heavily invested in equities when asked about the likely direction of the market will answer bullsih, otherwise why would they be so heavily invested ? Conversely bearish respondents are likely to have lowered or no equity exposure, hence their bearish response when surveyed. That said, the current low reading of bulls 38% (red circle) suggests that investors may be under-invested at the moment. While this data conflicts a bit with the initial chart. we would suggest that the Bull/Bear Survey tends to be a shorter term gauge, whereas the asset allocation survey tends to tracke a longer dated investment horizon. That said these data points may suggest a temporary bounce, given the low % of bulls, followed by potentially another downward wave given the Asset Allocation chart.
American Assoc. of Individual Investors Investor Bull/Bear Survey - Weekly Chart