Pessimism among individual investors fell to its lowest level since January 2012, according to the latest AAII Sentiment Survey. Optimism, meanwhile, surged higher for the second consecutive week.
Bullish sentiment, expectations that stock prices will rise over the next six months, rose 6.9 percentage points to 48.9%. This is the highest level of optimism registered by our survey since May 23, 2013. The historical average is 39.0%.
Neutral sentiment, expectations that stock prices will stay essentially unchanged, declined 1.4 percentage points to 32.8%. This is the seventh consecutive week and the 13th in the past 16 weeks that neutral sentiment is above its historical average of 30.5%.
Bearish sentiment, expectations that stock prices will fall over the next six months, fell 5.5 percentage points to 18.3%. This is the lowest level of pessimism since January 12, 2012. The historical average is 30.5%.
During the past two weeks, bullish sentiment has risen by a cumulative 18.6 percentage points and bearish sentiment has fallen by a cumulative 16.9 percentage points. At current levels, optimism is at the high end of its typical range (+1 standard deviation is a reading at or above 49.3%). Bearish sentiment is just shy of being at extraordinarily low levels (-2 standard deviations is a reading at or below 17.8%).
Since March, there have been sizeable swings in the sentiment pendulum, both to the bullish and the bearish sides. The recent optimistic stance comes as stocks have rebounded off of their June lows and are approaching record highs. Some AAII members are encouraged by signs of continued economic growth and the length of the current rally. Others, however, are concerned about prevailing valuations, the slow pace of economic growth, interest rate uncertainty and a lack of progress on key issues by Washington politicians.
This week's special question asked AAII members how much impact foreign events such as the Brazilian protests, the Egyptian political crisis and the Chinese liquidity crunch are having on their six-month outlook for stocks. More than half of the respondents (56%) said the events were having no or very little impact on their outlook. One respondent observed, "The world is a mess, but then again, it's always a mess." Approximately 19% said the events have some impact, while just 9% said the events are significantly impacting their outlook. A small number of respondents (6%) said the foreign events will increase volatility within the U.S. markets.
This week's AAII Sentiment Survey results:
- Bullish: 48.9%, up 6.9 percentage points
- Neutral: 32.8%, down 1.4 percentage points
- Bearish: 18.3%, down 5.5 percentage points
- Bullish: 39.0%
- Neutral: 30.5%
- Bearish: 30.5%
A new historical analysis of the AAII Sentiment Survey found that a correlation between low levels of optimism and good stock market performance over the following six- and 12-month periods exists. The analysis (Is the AAII Sentiment Survey a Contrarian Indicator?) is published in the June 2013 AAII Journal.
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: here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.