AAII % Bears 58.9, Highest Since October 18, 1990 After Iraq’s Invasion of Kuwait and During Peak of Recession

* Notwithstanding historical individual investor pessimism, corporate insiders continue to buy their own stocks.

The AAII percentage of bulls dropped to 19.6% this week from 25.7% the prior week. This reading is now at a very depressed level. The AAII percentage of bears rose to 58.9% this week from 55.2% the prior week. This reading is now at an extraordinarily elevated level. The last time the AAII % Bears was this high was October 18, 1990 after Iraq’s invasion of Kuwait and before Operation Desert Storm began on January 17, 1991. Moreover, the peak of the 1990-1991 recession also occurred during 4Q 1990 as US GDP contracted 3.0%. The S&P 500 rose 65% over the next three years after this peak in bearish sentiment.

As well, the 10-week moving average of the percentage of bears is currently at 49.7%, also an extraordinarily elevated level. It has only been higher one other period in its history, which was September 1990-December 1990. Moreover, the 10-week moving average of the percentage of bears peaked at 43.0% right near the major bear market low during 2002. It is astonishing that the 10-week moving average of the % bears is currently 6.7 percentage points greater than at any time during the bubble bursting meltdown of 2000-2003, which was arguably the worst stock market decline since the Great Depression.

Furthermore, the 50-week moving average of the percentage of bears is currently 39.7%, also an extraordinarily elevated level seen during only one other period since tracking began in the 80s. That period was October 1990-July 1991, right near another major stock market bottom. The extreme reading of the 50-week moving average of the percentage of bears during that period peaked at 41.6% on Jan. 31, 1991. The current reading of 39.7% is above the peak during the 2000-2003 bear market, which was 38.1% on April 10, 2003. I find this even more astonishing, notwithstanding the recent pullback, given that the S&P 500 is currently 94.1% higher from the October 2002 major bear market lows and 9.2% off its recent record high.

Individual investor pessimism towards US stocks is currently deep-seated and historical in nature, which bodes very well for further outsized gains over the intermediate-term. This is just more evidence of the current “US negativity bubble.” It is also noteworthy that as investor pessimism grows ever thicker, corporate insiders continue to display downright giddy behavior with their recent stock activity during this pullback. It is even more interesting that the retail sector is seeing substantial insider buying, notwithstanding the current extreme investor pessimism towards the prospects for consumer spending. During the 2000 economic downturn, insiders were bailing in droves. I still expect US stocks to turn in a positive return for this quarter, notwithstanding the poor start, as the undying belief in an imminent recession begins to fade and the uncertainty currently surrounding the financial sector lifts substantially.