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Retail investors stay cautious Add to ...

As the S&P 500 continues to flirt with three-year highs, retail investors are apparently pulling in their horns. Bespoke Investment Group reported that the latest reading on sentiment from the American Association of Individual Investors shows a decidedly bearish slant.

As of last week's reading, the bullish sentiment among these small investors was just 37.9 per cent, up from the previous week's reading but hardly - as Bespoke puts it - "ebullient"; consider that near the end of 2010, bullish sentiment came close to 65 per cent.

The sentiment readings from the AAII is often seen by observers as a contrarian indicator. That is, some believe that retail investors tend to be most bullish when the market is near a peak and ready to sell-off, and these investors tend to be most bearish when the market is near a low point and ready to rebound.

Clearly, this latest reading is a bit of a head-scratcher. The S&P 500 is at its highest level since June, 2008, prior to the worst of the financial crisis. Yet, apparently retail investors aren't enthusiastic buyers at these levels. If they're still a contrarian indicator, then it's onward and upward for stocks. And if stocks stumble from their current heights, then retail investors are not playing their part as contrarian indicators.

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