Optimism about the short-term direction of the stock market spiked to a four-year high in the latest AAII Sentiment Survey. Pessimism rebounded off of last week’s nine-year low, while neutral sentiment plunged.
Bullish sentiment, expectations that stock prices will rise over the next six months, jumped 5.2 percentage points to 57.9%. This is the largest amount of optimism registered by our survey since December 23, 2010 (63.3%). It is also the sixth consecutive week and the 13th out of the past 14 weeks with bullish sentiment above its historical average of 39.0%.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, plunged 9.5 percentage points to 22.8%. Neutral sentiment was last lower on March 14, 2013 (22.6%). The historical average is 30.5%.
Bearish sentiment, expectations that stock prices will fall over the next six months, rebounded by 4.3 percentage points to 19.3%. This is the fourth consecutive week and the 37th week this year with pessimism below its historical average of 30.5%.
Optimism has only been higher on 57 occasions during the nearly 28-year history of our survey. The six-month return for the S&P 500 following those readings was an average of 0.0% and a median of 0.5%. This is not surprising given that unusually high levels of bullish sentiment and unusually low levels of bearish sentiment (pessimism more than one standard deviation below its historical average for the second consecutive week) have tended to be followed by below-average six- and 12-month gains, as I explained in the June 2014 AAII Journal.
Individual investors continue to react positively to the market’s rebound from its mid-October lows. Also contributing to the level of optimism are earnings growth, the Federal Reserve’s ending of its bond purchasing program, falling energy prices and sustained economic expansion. Some AAII members may also be reacting to the outcome of the midterm elections. Keeping other AAII members cautious are geopolitical events, a sense that prevailing valuations are too high, the pace of economic growth and worries that a larger drop in stock prices is forthcoming. It is unclear what, if any, impact the midterm elections had on investor sentiment.
This week’s AAII Sentiment Survey results:
- Bullish: 57.9%, up 5.2 percentage points
- Neutral: 22.8%, down 9.5 percentage points
- Bearish: 19.3%, up 4.3 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.