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AAII Sentiment Survey: Neutral Sentiment Plunges

Bullish sentiment rose to a five-week high, as neutral sentiment fell to its lowest level in over a year in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, jumped 6.5 percentage points to 35.7%. This is the highest level of optimism registered by our survey since September 27, 2012. Even with the improvement, bullish sentiment remained below its historical average of 39% for the 10th consecutive week and the 30th out of the last 31 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 4.4 percentage points to 23.3%. The last time neutral sentiment was lower was October 6, 2011. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, declined 2.1 percentage points to 41.0%. This is the third consecutive week that pessimism has topped 40%. It is also the 10th consecutive week and the 26th out of the last 30 weeks that bearish sentiment has been above its historical average of 30%.

Even with the recent decline, bearish sentiment remains at unusually, but not extraordinarily, high levels. The recent downside volatility and lackluster third-quarter earnings season has dampened the moods of those investors who were already concerned about the pace of economic growth, Europe’s sovereign debt problems and the possibility of the fiscal cliff occurring. It is also possible that nervousness about the outcome of the election is having some impact on the results.

The improvement in bullish sentiment, however, shows that some investors are more encouraged about the short-term outlook for stock prices. Continued signs of a growing economy and earnings that are exceeding reduced forecasts are playing a role. Hurricane Sandy may have also inadvertently played a role by crowding out negative financial news headlines.

This week’s special question asked AAII members for their opinion of third-quarter earnings. The majority of respondents had a negative view of profits, describing them as sluggish, soft, awful or generally not good. Some said that profits are indicative of an economy that is slowing. A small number of respondents described earnings as being roughly in-line with their expectations or mixed. A few respondents said corporate profits exceeded their expectations.

Here is a sampling of the responses:

  • “Shows continued weakness as the economy declines.”
  • “Revenue is shrinking despite the relative preservation of earnings.”
  • “Awful, as I expected. It’s shocking that they are not worse.”
  • “They do not look very good so far.”
  • “They are lower than I expected, but still okay and consistent with a slow growth economy.”
  • “Mixed, but not as bad as I expected.”

This week’s Sentiment Survey results:

  • Bullish: 35.7%, up 6.5 percentage points
  • Neutral: 23.3%, down 4.4 percentage points
  • Bearish: 41.0%, down 2.1 percentage points

Historical averages:

  • Bullish: 39%
  • Neutral: 31%
  • Bearish: 30%

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