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AAII Sentiment Survey: Optimism Stays at an Unusually High Level

Optimism among individual investors remains at an unusually high level for the second consecutive week, according to the latest AAII Sentiment Survey. Conversely, pessimism is below 20% for a second consecutive week—an occurrence that has been rare during the past nine years. Despite this bullish stance, many individual investors are anticipating the S&P 500’s gain this year to be limited to no more than 10%.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose by a modest 0.8 percentage points to 51.7%. The rise keeps optimism above its historical average of 39.0% for the 19th time in 21 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined 1.2 percentage points to 29.0%. The decline keeps neutral sentiment below its historical average of 30.5% for the second consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose by 0.4 percentage points to 19.3%. Even with the modest rise, pessimism is below its historical average of 30.5% for the 11th consecutive week. Last year (2014), there were 43 weeks with a below-average reading for bearish sentiment.

Pessimism is below 20% on consecutive weeks for the just the third time since 2005. Bearish sentiment was below 20% on November 6 and 13, 2014, and on January 5 and 12, 2012. Bearish sentiment readings below 20.5% are unusually low (more than one standard deviation below average) and have been correlated with slightly lower than typical returns for the S&P 500 over the following six-month periods, as I explained in the June 2014 AAII Journal.

Bullish sentiment is above 50% for the second consecutive week and for the fifth time in nine weeks. Readings above 49.2% are unusually high. Unusually high levels of optimism have been historically correlated with below-average market gains over the following six and 12 months.

Individual investors are encouraged by the overall upward momentum of stock prices, falling energy prices, earnings growth and sustained economic expansion. Keeping other AAII members cautious are geopolitical events, the impact of falling oil prices on energy stocks, a sense that prevailing valuations for other stocks are too high, the pace of economic growth and worries that a large drop in stock prices is forthcoming.

This week’s AAII Sentiment Survey results:

  • Bullish: 51.7%, up 0.8 percentage points
  • Neutral: 29.0%, down 1.2 percentage points
  • Bearish: 19.3%, up 0.4 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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