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AAII Sentiment Survey: Neutral Sentiment Surges; Optimism Plunges

Neutral sentiment surged to a level not seen since last May in the latest AAII Sentiment Survey. The rise in neutral sentiment occurred as bullish sentiment fell to its lowest level since last summer.

Bullish sentiment, expectations that stock prices will rise over the next six months, plunged 8.2% percentage points to 31.6%. This is the lowest level of optimism since August 7, 2014 (30.9%). The drop puts bullish sentiment below its historical average of 39.0% for the first time in five weeks and just the fifth time in 31 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, jumped 6.2 percentage points to 43.0%. Neutral sentiment was last higher on May 22, 2014 (43.2%). The rise puts neutral sentiment above its historical average of 30.5% for the 10th consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 2.1 percentage points to 25.4%. Though at a five-week high, pessimism remains below its historical average of 30.5% for the fifth consecutive week and the 43rd out of the past 52 weeks.

Bullish sentiment has declined by a cumulative 15.4 percentage points since reaching a near-term high of 47.0% on February 19, 2015. Over the same period, neutral sentiment has risen by a cumulative 7.9 percentage points and bearish sentiment has risen by a cumulative 7.5 percentage points. The rebound in pessimism is occurring after bearish sentiment had fallen to an unusually low level of 17.9% on February 19, 2015.

Neutral sentiment is now at an unusually high level, meaning it is more than one standard deviation above its historical average. Unusually high levels of neutral sentiment have historically been associated with better-than-average market performance over the preceding 26- and 52-week periods. (See Analyzing the AAII Sentiment Survey Without Hindsight in the June 2014 AAII Journal for more information.)

The change in sentiment is occurring as the S&P 500 has pulled back from its recent highs. Though jitters about the Federal Reserve raising interest rates sooner than later have impacted stock prices, when asked two months ago, AAII members expressed mixed opinions about how the market would react to the first rate hike. More than 40% said they expect stock prices to fall in reaction to the announcement of the first rate hike, though about half of these respondents also predicted that the decline will be temporary.

Also playing weighing on AAII members’ short-term market outlooks are prevailing valuations, disappointing earnings or guidance from certain companies, geopolitical events, the pace of economic growth and worries that an even larger decline in stock prices could occur. Keeping some AAII members encouraged is the overall upward momentum of stock prices, sustained economic expansion, earnings growth and an accommodative monetary policy.

This week’s AAII Sentiment Survey results:

  • Bullish: 31.6%, down 8.2 percentage points
  • Neutral: 43.0%, up 6.2 percentage points
  • Bearish: 25.4%, up 2.1 percentage points

Historical averages:

  • 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.

 

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