Optimism Declines from Unusually High Levels


Optimism among individual investors decreased after having reached unusually high levels, according to the latest AAII Sentiment Survey. Coinciding with the decline in optimism is a six-week high in pessimism.

Bullish sentiment, expectations that stock prices will rise over the next six months, dropped 12.0 percentage points to 43.1%. Even with the decline, this is the 11th time in the past 13 weeks and the 13th in the last 17 weeks that bullish sentiment is above 40%. The historical average is 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged, rose 1.2 percentage points to 27.6%. This is the fifth time in the past six weeks that neutral sentiment is below its historical average of 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rebounded by 10.7 percentage points to 29.3%. This is the highest level of pessimism recorded by our survey since November 21, 2013. It is also, however, the 12th consecutive week and the 14th out of the past 16 weeks that bearish sentiment is below its historical average of 30.5%.

Though there was a significant drop in bullish sentiment from last week’s unusually high levels, individual investors, in aggregate, remain optimistic about the short-term direction of stock prices. Helping to fuel the optimism are earnings growth, economic growth and the new record highs established by the large-cap indexes. The two-year budget agreement has also alleviated worries about another partial government shutdown occurring this year, though a fight over the debt ceiling could renew concern about legislative standoffs. Keeping optimism from being higher are worries about the pace of economic growth, elevated stock valuations and the lack of a long-term fiscal solution.

This week’s special question asked AAII members how big of a gain or loss the S&P 500 will realize in 2014. Most respondents were optimistic, with 27% forecasting the large-cap index to gain between 6% and 10% and 29% forecasting the index to gain between 11% and 15%. Just 12% of respondents predicted the S&P 500 would decline this year. The most pessimistic forecast called for a loss of 30%, while the most optimistic forecast predicted a 38% gain.

This week’s AAII Sentiment Survey results:

  • Bullish: 43.1%, down 12.0 percentage points
  • Neutral: 27.6%, up 1.2 percentage points
  • Bearish: 29.3%, up 10.7 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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