AAII Sentiment Survey: Individual Investor Optimism Retracts from 1-Year High

This analysis examines the American Association of Individual Investors (AAII) Sentiment Survey results for the week ending January 21, 2026. Bullish sentiment among individual investors declined by 6.3 percentage points to 43.2% from the prior week’s 1-year high of 49.5%, while neutral sentiment rose to 24.1% and bearish sentiment increased to 32.7% [1][2]. Despite the pullback, bullish sentiment remains 5.7 percentage points above its 1-year historical average of 37.5%, suggesting persistent optimism among retail investors. The survey, widely regarded as a contrarian indicator, indicates that individual investors maintain elevated positive positioning even as major equity indices experienced modest weekly declines [0][1].

The week-over-week shift in AAII sentiment readings represents a significant normalization following an unusually elevated bullish reading in the prior week. The previous week’s bullish sentiment of 49.5% marked the highest level recorded in the past 12 months, placing the current 6.3 percentage point decline in perspective as a partial rather than complete retreat from optimistic extremes [2]. Individual investor sentiment has remained above average for 8 out of the past 11 weeks, demonstrating a persistent pattern of optimism that distinguishes the current market environment from more neutral historical baselines.

The neutral sentiment reading of 24.1% merits particular attention as it remains substantially below the 1-year average of 31.5% by 7.4 percentage points. This persistent suppression of neutral positioning indicates that individual investors are largely committing to directional bets rather than adopting a wait-and-see approach [2]. Such decisive positioning can amplify market volatility during trend reversals, as there is limited “dry powder” from neutral participants to provide stabilizing liquidity during price swings.

Bearish sentiment’s increase to 32.7% represents a 4.5 percentage point rise from the prior week’s 28.2%, though this reading is only modestly above the 1-year average of 31.0%. The net bull-bear spread narrowed considerably from +21.3 percentage points in the prior week to +10.5 percentage points in the current week, reflecting the sentiment normalization process [2]. However, the spread remains positive, indicating continued net optimism among the AAII membership base.

Market data from the survey period reveals modest declines across major indices, providing context for the sentiment pullback [0]. The S&P 500 declined by 0.50% from 6,944.46 to 6,909.71, while the NASDAQ fell by 0.48% from 23,530.02 to 23,415.96. The Dow Jones Industrial Average showed relative resilience with a minimal 0.14% decline, closing at 49,371.00 from 49,442.45. Notably, small-cap equities as measured by the Russell 2000 demonstrated strength with a 1.53% gain, closing at 2,715.57 from 2,674.56.

Sector performance on January 22, 2026, revealed notable divergence that may explain some of the sentiment dynamics [0]. Basic Materials emerged as the leading sector with a 1.33% gain, followed by Healthcare at +0.61% and Consumer Cyclical at +0.18%. Conversely, Utilities lagged significantly with a 1.86% decline, while Consumer Defensive fell by 0.60% and Communication Services declined by 0.39%. This sector rotation pattern—strength in economically sensitive sectors alongside weakness in traditionally defensive sectors—suggests investors are maintaining growth-oriented positioning despite broader market volatility.

The AAII Sentiment Survey’s value as a contrarian indicator stems from its ability to capture aggregate retail investor positioning at sentiment extremes that often precede market reversals. Academic research and practical market experience suggest that excessively high bullish readings (>45%) frequently coincide with overbought market conditions and elevated downside risk, while depressed bullish readings (<30%) often identify oversold conditions with favorable risk-reward profiles [2].

The current bullish reading of 43.2% occupies a middle ground—elevated enough to warrant caution from a contrarian perspective, but not so extreme as to signal immediate alarm. The prior week’s 49.5% reading represented a more clear-cut warning signal, and the 6.3 percentage point decline may partially satisfy the “excess optimism” condition that typically precedes corrective action. However, the sustained above-average bullish readings over the past 11 weeks (8 above-average readings) suggest a durable optimistic bias rather than a transient sentiment spike.

The unusually low neutral sentiment level of 24.1% adds complexity to the contrarian analysis. In typical applications, low neutral sentiment accompanies high conviction among market participants, which can fuel trending behavior in either direction. Combined with the elevated bullish sentiment, this configuration suggests retail investors are positioned for continued upside, potentially leaving the market vulnerable if price action fails to validate their expectations.

The AAII survey reveals a notable disconnect between elevated retail optimism and relatively flat-to-negative equity market performance. Individual investors have maintained bullish positioning through the past several weeks even as the S&P 500 has traded in a narrow range, suggesting confidence in continued upside that may not be fully reflected in current price levels [1][2]. This persistence of optimism through a period of muted returns could indicate either prescient positioning ahead of anticipated catalysts or potential for disappointment if favorable developments fail to materialize.

The divergence between small-cap strength (Russell 2000 +1.53%) and large-cap weakness (S&P 500 -0.50%) during the survey period may partially explain the maintained optimism [0]. Small-cap indices often serve as leading indicators for economic health, and their relative outperformance could be reinforcing individual investor confidence in domestic economic prospects. This sector rotation dynamic warrants monitoring as a potential early warning signal for broader market direction.

The 6.3 percentage point decline in bullish sentiment represents meaningful normalization but not a complete reversion to historical norms. If bullish sentiment continues to decline toward or below the 37.5% average in subsequent weeks, this would suggest the sentiment correction has further to run and potentially signal improved risk-reward for contrarian buyers. Conversely, if bullish sentiment rebounds toward 45% or higher, it would indicate the prior week’s extreme reading may be repricing as a new baseline rather than an anomaly.

The 8-out-of-11 weeks above-average reading pattern is particularly noteworthy and may reflect structural changes in investor psychology or market structure rather than purely cyclical sentiment dynamics [2]. Factors such as the proliferation of retail trading platforms, increased access to information, or fundamental shifts in risk appetite could be contributing to a persistently higher baseline for bullish sentiment compared to historical norms.

The juxtaposition of Basic Materials (+1.33%) as the leading sector alongside Utilities (-1.86%) as the lagging sector on the survey date reveals important information about risk appetite dynamics [0]. Basic Materials are economically sensitive and typically perform well when investors anticipate accelerating growth, while Utilities are defensive and tend to outperform when growth concerns increase. This sector configuration suggests investors maintaining growth-oriented positioning rather than adopting defensive postures, consistent with the elevated bullish sentiment readings.

The Healthcare sector’s 0.61% gain adds another layer of interpretation, as this sector traditionally occupies a middle ground between growth and defensive positioning. Its outperformance alongside Basic Materials reinforces the growth-oriented thesis, though the modest magnitude of gains across most sectors indicates tempered rather than exuberant risk appetite.

The analysis reveals several risk factors warranting attention from market participants. First, elevated bullish sentiment that remains above historical averages despite a significant pullback suggests potential for continued short-term weakness if the sentiment normalization process extends further [1][2]. The contrarian framework indicates that extended periods of above-average bullish sentiment often precede underperformance, and the current 5.7 percentage point excess above the 1-year average represents meaningful headroom for sentiment normalization.

Second, the historically low neutral sentiment reading of 24.1% creates conditions for amplified volatility during any trend reversal. With limited participants maintaining flexible positioning, market moves could be exaggerated as the limited neutral cohort adjusts their stance in response to price action. This dynamic increases the importance of position sizing and risk management for directional bets.

Third, the sector rotation pattern—particularly Utilities’ 1.86% decline—may signal rotation out of defensive positioning that could accelerate if market weakness persists. If investors who have maintained optimistic positioning begin to lose confidence, the subsequent rotation could be more pronounced than the modest current sector divergence suggests [0].

From a contrarian perspective, the current sentiment readings present potential opportunity if extreme bearishness develops in subsequent readings. Historical patterns suggest that readings of bullish sentiment below 30% often identify attractive entry points, and the current above-average reading combined with recent volatility may be creating conditions for such a setup [2]. The partial normalization from the 49.5% peak suggests some of the excess optimism has already been wrung out, potentially improving the risk-reward profile for tactical positions.

The small-cap strength during the survey period (Russell 2000 +1.53%) may also present opportunity if this relative outperformance continues [0]. Small-cap equities often lead recoveries from sentiment-driven pullbacks, and the sector’s resilience during a period of retail-optimism normalization could indicate underlying fundamental support that warrants attention.

The AAII Sentiment Survey for the week ending January 21, 2026, documents a meaningful but incomplete pullback in individual investor optimism. Bullish sentiment declined to 43.2% from the prior week’s 1-year high of 49.5%, remaining 5.7 percentage points above the 1-year average [1][2]. Neutral sentiment at 24.1% remains substantially below its 31.5% historical average, indicating decisive rather than hedged positioning among retail investors. Bearish sentiment rose to 32.7%, modestly above its 31.0% average.

Market performance during the survey period showed modest declines in major indices with small-cap outperformance [0]. The S&P 500 declined 0.50%, the NASDAQ fell 0.48%, while the Russell 2000 gained 1.53%. Sector rotation favored economically sensitive Basic Materials (+1.33%) over defensive Utilities (-1.86%).

As a contrarian indicator, the current elevated bullish reading suggests caution, though the partial normalization from the prior week’s extreme reduces immediate concern. The combination of above-average bullish sentiment and below-average neutral sentiment creates conditions for potentially amplified volatility during any trend changes. Market participants should monitor subsequent weekly readings for continued normalization toward historical norms or rebound toward elevated levels, which will inform the contrarian outlook and risk assessment going forward.