One such market [sentiment] indicator is the weekly American Association of Individual Investors (AAII) survey, which for weeks has indicated optimism among retail investors. I have noticed that many market participants are reacting to this survey's bullishness with caution. In fact, we would argue that the intense focus on this survey has kept many would-be investors on the sidelines, as they use this survey as a contrarian signal, missing the market's advance in the process.
The bullish sentiment found in this survey is in major conflict with actual fund flows in the domestic equity fund world, a more robust measure of retail market sentiment. For example, one might anticipate that on the heels of double-digit 2010 gains and a fresh start to a new year, fund flows into domestic equity funds would have been positive. However, in the first week of 2011, fund flows were more negative than they were during any of the first weeks of the prior five years. As a reminder, this period includes 2008-2009, the height of the real estate bust and financial crisis. So, while some avoid the market due to "excessive optimism," there is evidence that fear among this contingent of investors is higher now than during the dreary fundamental and technical backdrop of 2008-2009.
~ Todd Salamane, "Monday Morning Outlook: DJIA 12,000 is Within View,"January 15, 2011