The percentage of individual investors describing their short-term outlook as optimistic stayed above 40% for the third consecutive week in the latest AAII Sentiment Survey. Meanwhile, the percentage holding a pessimistic outlook stayed at an unusually low level.
Bullish sentiment, expectations that stock prices will rise over the next six months, declined 1.2 percentage points to 47.7%. This is the first time optimism has been above 40% for at least three consecutive weeks since February 21, 2013. The historical average is 39.0%.
Neutral sentiment, expectations that stock prices will stay essentially unchanged, declined 1.8 percentage points to 31.0%. Though neutral sentiment has declined for three consecutive weeks, it is above its historical average of 30.5% for the eighth consecutive week and the 14th out of the past 17 weeks.
Bearish sentiment, expectations that stock prices will fall over the next six months, rebounded by 3.0 percentage points to 21.3%. This is the fourth time in five weeks that pessimism has been below its historical average of 30.5%.
Bearish sentiment remains at an unusually low level (-1 standard deviation is a reading at or below 21.8%). Since 1987, there has been a slight underperformance for the S&P 500 when bearish sentiment has been similar levels: a median six-month return for the S&P 500 of 4.5% versus 4.7% for all periods.
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 for their opinion about how clearly the Federal Reserve is communicating its intentions for monetary stimulus. Respondents were split with 45% saying the central bank is being clear and 33% saying the Fed is not being clear. Some individual investors said the central bank is stating its intentions, but traders and market commentators are creating confusion. Others thought the Fed is purposely muddying their message.
Here is sampling of the responses:
- "I think the Fed has been quite clear. The market, however, seems to interpret the information differently."
- "The Fed is being clear, but the market speculators aren't listening."
- "The Fed is being clear. You have to read what they say and not rely on all the talking head spin doctors."
- "It's not clear to me because Fed officials couch their speeches in terms that may be interpreted in several different ways."
- "They are making it up as they go along. Their policy is as clear as mud."
This week's AAII Sentiment Survey results:
- Bullish: 47.7%, down 1.2 percentage points
- Neutral: 31.0%, down 1.8 percentage points
- Bearish: 21.3%, up 3.0 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: http://www.aaii.com/sentimentsurvey
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.