There are two main types of investors in the U.S. market...
First, you've got the professionals. These are the people at big institutions who spend all day thinking about which stocks to own and how to allocate capital. They're in the business of markets.
On the other side are retail investors – the regular folks. The mom-and-pop crowd might not be as sophisticated as the big-money investors... They don't have the same tools or information. But their actions can still tell us a lot.
When we think about market sentiment, we're looking at one of these two groups. Often, the pros are more reliable. They're usually only wrong at extremes.
Meanwhile, retail investors tend to be a contrarian indicator. And today, mom-and-pop investors own stocks at the highest level in years.
You might think that's a clear reason to sell. It's not, as we'll see... But it's a shift that we need to watch closely.
Let me explain...
High Stock Ownership Isn't an Alarm Bell... Yet
The institutional crowd is full of steady decision-makers. Again, these folks think about markets day in and day out... So they don't hit sentiment extremes as often.
Retail investors are more emotional. And as I said, these folks are making a big bet on stocks right now...
We can see this by looking at data from the American Association of Individual Investors ("AAII"). The often-discussed AAII Investor Sentiment Survey asks mom-and-pop investors whether they're feeling bullish or bearish on stocks.
But AAII also asks what folks are doing with their money through its Asset Allocation Survey...
Specifically, it asks respondents each month what percentage of their portfolio is in stocks. If you expect stocks to move higher, you'll probably own more of them. And right now, retail investors are positioned for a rising stock market.
Take a look at retail investors' stock allocations today...
Mom-and-pop investors report having more than 70% of their portfolios in stocks. That's the highest reading since late 2021. And it's darn close to its highest level since 2000.
Regular folks own a lot of stocks today. But are they getting too bullish? Is this a screaming sell signal?
Not at all...
These investors own a lot of stocks... But they aren't euphoric. According to the Sentiment Survey, just 43% of respondents say they're bullish over the next six months.
For comparison, that figure hit 57% in 2021. In early 2018, it hit 60%. And in 2000, it was a staggering 75%.
So yes, mom-and-pop investors own a lot of stocks. But they aren't expressing the kind of euphoric sentiment we'd normally expect near a peak.
That tells me this setup is worth watching – but it's not enough on its own to sound the alarm. We'd need to see retail investors' sentiment readings reach bullish extremes, too.
And if the institutional crowd joins in, we'd have a real warning sign on our hands. That would mean the experts are becoming irrational... jumping in with the herd in search of big gains.
We're not there yet. And that tells me this bull market can continue.
Good investing,
Brett Eversole
Further Reading
Most investors are told to "trust their gut." But in the market, instincts often push people to hold losers too long or sell winners too early. Better results come from replacing emotion with simple rules that remove fear from decisions.
When markets are rising, investors overcomplicate things. They make moves they shouldn't because they're worried about the next dip – and end up leaving profits on the table. In bull markets, your biggest goal should be staying along for the ride.