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Neutral sentiment surged to its highest level since 2005 in the latest AAII Sentiment Survey, as optimism dropped to a five-week low.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 9.5 percentage points to 35.6%. This is the first time optimism has been below 40% since June 27, 2013. The historical average is 39%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged, spiked by 7.1 percentage points to 39.4%. This is the highest neutral sentiment has been since April 14, 2005. It is also the 10th consecutive week that neutral sentiment is above its historical average of 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 2.4 percentage points to 25.0%. Though technically a five-week high, this is also the sixth time in seven weeks that pessimism is below its historical average of 30.5%.

Neutral sentiment is at the lower edge of what we consider to be unusually high levels (more than one standard deviation above average). Though the current reading shows a significant rise, it should be noted that this week is the 16th in the past 19 weeks with an above-average level of neutral sentiment. Furthermore, the drop in bullish sentiment corresponds with the volatility we have seen in the weekly survey results over the past several months.

Some individual investors are encouraged by signs of continued economic growth, sustained earnings 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 if they thought the market is pricing in future growth or if they think the market is detached from current economic and earnings trends. Respondents were split with one-third saying the market is pricing in expectations of future growth and one-third saying the market is detached. Among those who thought the market was detached, several cited the weak pace of economic expansion, slow earnings growth or the Federal Reserve's ongoing monetary stimulus as the reasons why. A small number (less than 10%) of respondents thought the market is fairly valued at current levels.

Here is a sampling of the responses:

  • "I think the economy will continue to improve over the next several months and the stock market will also go up."
  • "I think the increase in P/E ratios reflects the anticipation of future growth. The signs point to growth, but not exuberant growth."
  • "The market is detached from the actual economic and earnings trends, and is relying considerably on the actions of the Federal Reserve."
  • "I think the market is going up despite the fact that earnings are not. Investors are overly optimistic."
  • "The market is fairly valued now and won't go anywhere without more profits."

This week's AAII Sentiment Survey:

  • Bullish: 35.6%, down 9.5 percentage points
  • Neutral: 39.4%, up 7.1 percentage points
  • Bearish: 25.0%, up 2.4 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

Source: AAII Sentiment Survey: Neutral Sentiment At An 8-Year High