Neutral sentiment is near a 12-year high, according to the latest AAII Sentiment Survey. Bullish sentiment fell below 40% for the first time since November 21, 2013.
Bullish sentiment, expectations that stock prices will rise over the next six months, fell 4.6 percentage points to 39.0%. This is the first time in eight weeks and just the third time in the past 15 weeks that bullish sentiment is below 40%. The historical average is 39.0%.
Neutral sentiment, expectations that stock prices will stay essentially unchanged, spiked 8.1 percentage points higher to 39.5%. This is highest neutral sentiment has been since May 2, 2002 (39.6%). It is also the first time neutral sentiment is higher than bullish sentiment since November 21, 2013. The historical average is 30.5%.
Bearish sentiment, expectations that stock prices will fall over the next six months, declined 3.5 percentage points to 21.5%. This is the 14th consecutive week and the 16th out of the past 18 weeks with pessimism below its historical average of 30.5%.
At current levels, neutral sentiment is right at the lower limit of what we would consider to be an unusually high reading (more than one standard deviation above average.) Bearish sentiment is close to, but not below, the upper limit of what we would consider to be an unusually low reading.
The market's bumpy start to the New Year curtailed some of the short-term optimism AAII members have had. Nonetheless, many individual investors remain hopeful about the six-month direction of stock prices because of earnings growth, economic growth, the record highs established by the large-cap indexes and the Federal Reserve's tapering of its bond purchases. Limiting the extent of the optimism are worries about the pace of economic growth, elevated stock valuations and frustration with Washington politics.
This week's special question asked AAII members whether they thought the market is pricing in future growth or if it is detached from actual economic and earnings trends. Slightly less than half of all respondents (48%) said the market is detached from the underlying economic and earnings trends. These respondents primarily cited the impact of monetary stimulus as the reason why. About a third of respondents (32%) said the market is pricing in future growth. Anticipated stronger earnings growth was the primary reason given as to why.
Here is a sampling of the responses:
- "Detached from real trends. Quantitative easing is keeping it alive along with pundits' euphoria."
- "The stock market is detached because it is the only place for most investors to put their money. The consequences will be a bubble."
- "The future growth the market is pricing is unreasonably high."
- "I think it is pricing in future growth-projecting current growth to both continue and improve."
- "I think the present market values include expectations of reasonably good growth in the future."
This week's AAII Sentiment Survey results:
- Bullish: 39.0%, down 4.6 percentage points
- Neutral: 39.5%, up 8.1 percentage points
- Bearish: 21.5%. down 3.5 percentage points
- 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 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.