The last time AAII (American Association of Individual Investors) had such low allocations in their portfolios for stocks was in 2002. Then, one has to go clear back to early 1991. In both cases the markets were hammering out a bottom so this is a very good sign. We were also in the midst of a recession then, and in 2002, we were in a terrible economic environment with dire predictions for the future.
The S&P 500 had suffered two consecutive 5% drops for only the second time in history. The Dow Jones Industrial Average did not decline quite as much, however the back-to-back were ones for the record books. More encouraging is that when markets have fallen like they did this week with their back-to-back declines of 5% or more, the Dow has in almost every case experienced very healthy returns going forward.
The two big rallies of 7% and how quickly the markets went from oversold to overbought is a good indication that we could very well see higher prices for stocks going forward.
Additionally, corporate insiders have stepped up their buying, the S&P 500 and NASDAQ liquidity premium is high (meaning their is an aversion to buying individual stocks) so mutual funds or ETF's are bought instead, high put/call ratios, high short interest by the public, high mutual fund outflows, and the few number of new highs to now lows on the NASDAQ, and the weekly Investors Intelligence Survey of newsletters continues to show a high percentage of bears, and low % of bullish market forecasts.
One last observation is that new market uptrends began in 1991 and 2002 (market bottomed), 2003 (market had retest to some extend of lows in March) when job losses were still taking place.