Question 1

What is contrarian investing?

Accepted Answer

Contrarian investing is an investment strategy that goes against prevailing market sentiment. Contrarian investors buy when others are fearful (market bottoms) and sell when others are greedy (market tops). This strategy is based on the principle that extreme sentiment often signals market turning points.

Question 2

What is the CNN Fear and Greed Index?

Accepted Answer

The CNN Fear and Greed Index is a market sentiment indicator that measures investor emotion on a scale from 0 (Extreme Fear) to 100 (Extreme Greed). It analyzes 7 market factors including volatility, market momentum, stock price strength, safe haven demand, put/call options, junk bond demand, and market breadth. Readings below 25 indicate extreme fear (potential buying opportunity), while readings above 75 suggest extreme greed (potential market top).

Question 3

What is the AAII Sentiment Survey?

Accepted Answer

The AAII Sentiment Survey is a weekly poll conducted by the American Association of Individual Investors asking members whether they are bullish, bearish, or neutral on the stock market over the next six months. The bull-bear spread (bullish percentage minus bearish percentage) is a key contrarian indicator. When the spread exceeds +20%, it signals excessive optimism and potential market tops. When below -20%, it indicates extreme pessimism and potential buying opportunities.

Question 4

What is the Bank of America Sell Side Indicator (SSI)?

Accepted Answer

The Bank of America Sell Side Indicator (BofA SSI) tracks the average recommended equity allocation from Wall Street strategists. It is a contrarian indicator because when strategists are most bullish (recommending high equity allocations above 60%), markets often underperform, and when they are most bearish (recommending allocations below 50%), markets typically outperform. The SSI has a strong track record of identifying market extremes.

Question 5

When should contrarian investors buy stocks?

Accepted Answer

Contrarian investors should consider buying when multiple sentiment indicators show extreme fear: Fear & Greed Index below 25, AAII bull-bear spread below -20%, and BofA Sell Side Indicator below 50%. These conditions indicate widespread pessimism and potential market bottoms. Historical data shows that buying during extreme fear periods often leads to strong subsequent returns.

Question 6

When should contrarian investors sell stocks?

Accepted Answer

Contrarian investors should consider selling when sentiment indicators show extreme greed: Fear & Greed Index above 75, AAII bull-bear spread above +20%, and BofA Sell Side Indicator above 60%. These conditions suggest excessive optimism and euphoria, which often precede market corrections or bear markets.

Question 7

How do I get daily market sentiment alerts?

Accepted Answer

Subscribe to Contrarian Signals for $9/month to receive daily email alerts at 8:00 AM ET. Each alert includes current readings from the Fear & Greed Index, AAII Sentiment Survey, Bank of America Sell Side Indicator, historical context, and a contrarian BUY/SELL/HOLD recommendation. Cancel anytime with no commitment.

Question 8

How accurate are sentiment indicators for market timing?

Accepted Answer

Sentiment indicators are most effective at identifying market extremes rather than precise timing. Studies show that buying during periods of extreme fear (Fear & Greed below 25) and selling during extreme greed (above 75) has historically outperformed buy-and-hold strategies. The BofA Sell Side Indicator has been particularly accurate, with extreme readings often preceding major market moves within 6-12 months.

Question 9

What makes a good contrarian investment signal?

Accepted Answer

The best contrarian signals occur when multiple independent sentiment indicators reach extreme levels simultaneously. For example, when Fear & Greed Index is below 25, AAII sentiment shows excessive bearishness (spread below -20%), and BofA SSI is below 50%, it creates a strong confluence signal. Single indicator extremes are less reliable than multiple indicators confirming the same market condition.

Question 10

How often should I check market sentiment indicators?

Accepted Answer

For most investors, checking sentiment indicators daily or weekly is sufficient. The CNN Fear & Greed Index updates daily, the AAII Sentiment Survey updates weekly (typically Thursday), and the BofA Sell Side Indicator updates monthly. Daily email alerts from Contrarian Signals provide all three indicators in one convenient summary each morning at 8:00 AM ET.

Question 11

What is the VIX market volatility component of Fear and Greed?

Accepted Answer

The Market Volatility (VIX) component measures the CBOE Volatility Index relative to its 50-day moving average. The VIX, often called the 'fear gauge', measures expected volatility in the S&P 500. When VIX is significantly above its moving average, it indicates fear as investors expect larger price swings. When VIX is below its moving average, it signals complacency or greed. This component is one of seven factors in the CNN Fear & Greed Index.

Question 12

What is the Put/Call ratio in the Fear and Greed Index?

Accepted Answer

The Put and Call Options component tracks the put/call ratio, which compares trading volume of put options (bets that stocks will fall) to call options (bets that stocks will rise). A ratio above 1.0 indicates more put buying than call buying, signaling defensive positioning and fear. A ratio below 1.0 shows more call buying, indicating optimism or greed. This ratio helps identify whether options traders are positioning for market declines or advances.

Question 13

What is Stock Price Momentum in Fear and Greed?

Accepted Answer

Stock Price Momentum measures the S&P 500 level relative to its 125-day moving average. When the S&P 500 trades significantly above its 125-day moving average, it indicates strong positive momentum and potential greed. When trading below this average, it signals negative momentum and fear. This component helps identify whether the market trend is bullish or bearish relative to its medium-term trend.

Question 14

What is the Junk Bond Demand indicator?

Accepted Answer

Junk Bond Demand measures the spread between yields on junk bonds (high-yield corporate bonds) and safer Treasury bonds. When investors are greedy and confident, they accept smaller yield premiums for risky junk bonds, narrowing the spread. During fearful periods, investors demand much higher yields for taking on credit risk, widening the spread. Narrow spreads indicate risk appetite and greed, while wide spreads signal fear and risk aversion.

Question 15

What is Stock Price Breadth?

Accepted Answer

Stock Price Breadth compares the volume of advancing stocks versus declining stocks on the NYSE. Positive breadth occurs when advancing volume significantly exceeds declining volume, indicating broad market participation and greed. Negative breadth, where declining volume dominates, signals widespread selling and fear. Strong breadth confirms healthy market rallies, while weak breadth during rallies can signal fragility.

Question 16

What is Safe Haven Demand in the Fear and Greed Index?

Accepted Answer

Safe Haven Demand compares the performance of stocks versus bonds. When stocks outperform bonds, it indicates risk appetite and greed as investors seek higher returns. When bonds outperform stocks significantly, it signals a flight to safety and fear as investors prefer the security of fixed income over equities. This component captures relative performance between risk assets and safe havens.

Question 17

What is Stock Price Strength measured in Fear and Greed?

Accepted Answer

Stock Price Strength measures the ratio of stocks hitting 52-week highs versus 52-week lows on the NYSE. A high ratio indicates many stocks at peak prices, signaling strength and potential greed. A low ratio shows many stocks at yearly lows, indicating weakness and fear. This component helps identify whether the market is experiencing widespread strength or weakness across individual securities.

Question 18

How often does the AAII Sentiment Survey update?

Accepted Answer

The AAII Sentiment Survey updates weekly, typically every Thursday evening. The survey asks members their outlook for the stock market over the next six months: bullish, bearish, or neutral. Results are published immediately after polling closes and represent one of the most timely measures of individual investor sentiment. Historical data shows the survey has been conducted continuously since 1987, providing over 35 years of sentiment data.

Question 19

What is a normal AAII bull-bear spread reading?

Accepted Answer

The historical average AAII bull-bear spread is approximately -1% to +5%, meaning bullish sentiment typically slightly exceeds bearish sentiment. A spread between -10% and +10% is considered neutral. Extreme readings occur when the spread exceeds +20% (excessive optimism, potential sell signal) or falls below -20% (excessive pessimism, potential buy signal). The spread oscillates around zero, with extremes offering the best contrarian opportunities.

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OVERALL CONTRARIAN SIGNAL

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BOFA SSI

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