The latest AAII Sentiment Survey shows a positive reaction by individual investors to the new record highs established by large-cap stocks. Optimism surged back above 50%, while pessimism plunged.
Bullish sentiment, expectations that stock prices will rise over the next six months, ended a three-week slide with a 12.2 percentage point rebound to 50.9%. The rebound puts optimism above its historical average of 39.0% for the 18th time in 20 weeks.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 4.2 percentage points to 30.2%. The decline puts neutral sentiment below its historical average of 30.5% for the first time in four weeks.
Bearish sentiment, expectations that stock prices will fall over the next six months, plunged 8.0 percentage points to 18.9%. This is a seven-week low. It is also the 10th consecutive week and the 43rd week this year with pessimism below its historical average of 30.5%.
This is the fourth time in eight weeks that bullish sentiment is above 50%. Readings above 49.2% are unusually high. Bearish sentiment, meanwhile, is at an unusually low level (below 20.5%) for the third time in eight weeks. Unusually high levels of optimism have been historically correlated with below-average market gains over the following six and 12 months, as I explained in the June 2014 AAII Journal.
The rebound in optimism occurred as the S&P 500 and the Dow Jones industrial average avoided what would have been their second pullback this calendar quarter and rebounded to new record highs. Individual investors are also encouraged by falling energy prices, earnings growth and sustained economic expansion. Keeping other AAII members cautious are geopolitical events, weakness in energy stocks, a sense that prevailing valuations for other stocks are too high, the pace of economic growth and worries that a larger drop in stock prices is forthcoming.
This week’s AAII Sentiment Survey results:
- Bullish: 50.9%, up 12.2 percentage points
- Neutral: 30.2%, down 4.2 percentage points
- Bearish: 18.9%, down 8.0 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.