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Individual investor optimism fell and pessimism rose to levels not seen since late June, according to the latest AAII Sentiment Survey. Meanwhile, neutral sentiment continued its longest streak of above-average readings since the late 1990s.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 5.0 percentage points to 34.5%. This is a seven-week low. It is the second time in three weeks that bullish sentiment is below its historical average of 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged, rose 3.5 percentage points to 37.3%. This is the 12th consecutive week and the 18th out of the past 21 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, rose 1.5 percentage points to 28.2%. This fifth consecutive weekly increase puts pessimism at a seven-week high. Nonetheless, bearish sentiment is below its historical average of 30.5% for the seventh consecutive week and the 12th time in 15 weeks.

The bull-bear spread, which is bullish sentiment minus bearish sentiment, is now at 6.3. This is narrowest reading since June 26, 2013, when the bull-bear spread was -4.9.

We have not seen neutral sentiment mostly stay above 30.5% for an extended period of time since the late 1990s. During the period of September 4, 1997 through November 4, 1999, neutral sentiment was above 30.5% for 108 out of 114 weeks.

The continued elevated levels of neutral sentiment are indicative of the cautiousness exhibited by individual investors. Though many individual investors are encouraged by earnings growth, the ongoing economic expansion and rising stock prices, many others are concerned about the pace of economic and earnings growth, market valuations and a lack of progress on key issues by Congress and the president.

This week's special question asked AAII members what they thought the odds of a pullback in stock prices occurring this month or next month were. We specifically asked them to state the odds on a range from very likely to very unlikely. Just over 3% of all respondents described the chances of a pullback occurring as either unlikely or very unlikely. In contrast, 19% said a pullback was very likely, 31% said a pullback was likely and 24% said a pullback was somewhat likely. The top reason was that the market has gotten ahead of itself. The second most commonly given reasons were a potential tapering in bond purchases by the Federal Reserve and a fight in Congress over the budget and the debt ceiling.

Here is a sampling of the responses:

  • "Somewhat likely. The market is very sensitive to the Federal Reserve's actions and statements."
  • "Likely. The market needs to consolidate and the slow time of the year should give it a chance."
  • "Very likely. The market is too high and August and September are usually down months."
  • "Very likely as Congress deals with debt ceiling issues."
  • "Somewhat likely. The market has been up all year and some profit taking will likely come in."

This week's AAII Sentiment Survey results:

  • Bullish: 34.5%, down 5.0 percentage points
  • Neutral: 37.3%, up 3.5 percentage points
  • Bearish: 28.2%, up 1.5 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: Individual Investors Turn More Cautious