The proportion of individual investors expressing optimism about the short-term direction of the stock market surged to 49.7% in the latest AAII Sentiment Survey. At the same time, pessimism plunged.
Bullish sentiment, expectations that stock prices will rise over the next six months, jumped by 7.0 percentage points to 49.7%. This is the highest level of optimism registered by our survey since August 28, 2014 (51.9%). It is also the 10th week out of the past 11 with optimism above its historical average of 39.0%.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rebounded by 4.2 percentage points to 27.8%. Even with the increase, neutral sentiment is below its historical average of 30.5% for the fourth week in the past five.
Bearish sentiment, expectations that stock prices will fall over the next six months, fell by 11.2 percentage points to 22.5%. The large drop puts pessimism at its lowest level since August 28, 2014.
As the results to this week’s special question show, many individual investors viewed the recent downward volatility as a buying opportunity. The pullback in the S&P 500 and the correction in the Russell 2000 made valuations more attractive and helped to alleviate concerns about stock prices having moved too far upward too fast. Also contributing to the level of optimism are earnings growth, sustained economic expansion and the Federal Reserve’s tapering of bond purchases. Keeping other AAII members cautious are worries that a larger drop in stock prices is forthcoming, a sense that prevailing valuations are still too high, geopolitical events, the pace of economic growth and Washington politics.
Bullish sentiment has risen by a cumulative 14.3 points over the past three weeks. At current levels, optimism is at an unusually high level (more than one standard deviation above average). Past readings of unusually high optimism have typically been followed by lower-than-average levels of market gains, as I explained in the June 2014 AAII Journal.
This week’s AAII Sentiment Survey results:
- Bullish: 49.7%, up 7.0 percentage points
- Neutral: 27.8%, up 4.2 percentage points
- Bearish: 22.5%, down 11.2 percentage points
- Bullish: 39.0%
- Neutral: 30.5%
- Bearish: 30.5%
The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online at: http://www.aaii.com/sentimentsurvey.