Despite the big rally, it's hard to see who's buying

The latest survey of individual investors from the fine folks at the American Association of Individual Investors (AAII) showed a big drop in optimism. It's not just that one survey - several others are also showing tepid sentiment at best.

Our Backtest Engine shows that following any week when the Bull Ratio (Bulls / (Bulls + Bears)) was below 32%, forward returns in the S&P 500 were consistently positive.

What's outstanding about the current week's reading is that it isn't coming after a big decline. Quite the opposite.

There has never been a period when optimism was so low after such a big rally. Out of the 54 times when the S&P 500 showed a gain of 10% or more over a 7-week period, not one of them (until this week) saw more than 50% of respondents consider themselves bearish.

The only times more than 40% of respondents were bearish were December 1990 and a few weeks from April - August 2009.

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We also looked at:

• News sentiment is nearing the most pessimism in 35 years
• Hedge funds don't seem to be levering up
• Fund flows continue to be weak into equities
• Rydex traders are still showing pessimism
• Consumers' outlooks on stocks are still tepid
• The VIX Term Structure hit a 50-day low even while most stocks are still below their 200-day moving averages
• Optimism on XLK is extremely high
• The Nasdaq keeps moving by +/- 1%, nearing the most such moves over a 2-month period
• The Nasdaq/S&P 500 ratio is well above its 50-day average
• Canadian stocks keep rising