AIM Higher

By Brad Lamensdorf and John Del Vecchio

SentimenTrader.com’s AIM model (Advisor and Investor Model) suggests a short-term bounce is in order.

AIM model

SentimenTrader.com’s AIM model (Advisor and Investor Model) suggests a short-term bounce is in order.

A quick eyeball test will tell you that when the indicator is below the green line, the market is ripe for a healthy bounce. Recently, the indicator collapsed sharply from overbought to oversold. As a result, we think being aware of this situation is even more important than at other points in history.

Here’s some detail on the construction of the model.

Construction:

The Advisor & Investor Model (AIM) is a model consisting of sentiment readings from several popular (and some not-so-popular) advisor and investor surveys. The index is computed on a weekly basis.

This model takes advantage of the fact that when the typical investor and investment advisor should be most bullish, they are most bearish. And, when the markets are getting overbought and are about to turn, these Johnny-come-lately are most bullish.

When a preponderance of the survey respondents are more bullish than they’ve been in the recent past, then the model will move towards its upper (red) trading band. When it approaches this band (or exceeds it), then we should be concerned that too many investors are expecting higher prices, have likely already bought, and therefore support for further prices gains is minimal.

Alternatively, when the model has moved towards or outside of its lower (green) trading band, then we know that investors have soured on the market’s prospects to an extreme degree. This rarely lasts long, as the market has a strong tendency to rebound after such episodes. These signals are especially strong when the market tone is positive (e.g. the 40-week moving average of a broad index like the S&P 500 is rising).

Originally Posted on October 1, 2021 – AIM Higher

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