Neutral sentiment stayed above 40% for the fourth consecutive week in the latest AAII Sentiment Survey. This is the first time we have seen such a streak since the summer of 1998 (June 25 through July 16, 1998). Bullish sentiment declined this week, while bearish sentiment rebounded.
Bullish sentiment, expectations that stock prices will rise over the next six months, fell 2.7 percentage points to 30.4%. The drop keeps bullish sentiment below its historical average of 39.0% for the 10th consecutive week.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined 1.1 percentage points to 43.2%. This was the first decline in neutral sentiment in six weeks. Nonetheless, neutral sentiment remains above its historical average of 30.5% for the 20th consecutive week.
Bearish sentiment, expectations that stock prices will fall over the next six months, rose 3.8 percentage points to 26.4%. The increase was not large enough, however, to prevent pessimism from being below its historical average of 30.5% for the fifth straight week.
Unusually high levels of neutral sentiment have historically been followed by above-average market returns in the following six and 12-month periods. It should be noted, however, that the data used is from 1987 through 2003. Since that time, neutral sentiment reached unusually high levels only once (2013) before this year. I will have a more detailed explanation in a new analysis of the AAII Sentiment Survey I conducted for the June issue of the AAII Journal.
The unusually high level of neutral sentiment registered by the survey is reflective of the uncertainty many individual investors have about the short-term direction of stock prices. Optimism about the market's resilience, economic expansion, the Federal Reserve's tapering of bond purchases and low interest rates is being offset by the events in Ukraine, the slow rate of economic expansion, Federal Reserve tapering and frustration with Washington politics.
This week's special question asked AAII members what they thought about the recent occurrence of the Dow setting new record highs and the 10-year Treasury bond yield falling back below 2.6% at the same time. Members gave several varying opinions that ranged from calling bond yields unsustainable to viewing the stock market as reaching speculative levels. The largest number of respondents, about 18%, attributed the occurrence to the Federal Reserve's quantitative easing policy. Slightly less than 15% of respondents described the rise in large-cap stock prices and the pullback in bond yields as either being odd or a mixed signal from the financial markets. Nearly 13% of respondents think a flight to safety is occurring.
Here is a sampling of the responses:
- "Anxiety by investors has people looking for safety."
- "Something is askew. Probably the easy money policy."
- "It is being caused by the flight to safety due to headline news in Europe, the South China Sea, the Middle East and Africa."
- "It's the result of quantitative easing. The end of quantitative easing will be a disaster."
- "I think it's weird, but we ought to know by now that the markets (and people) are not rational."
This week's AAII Sentiment Survey:
- Bullish: 30.4%, down 2.7 percentage points
- Neutral: 43.2%, down 1.1 percentage points
- Bearish: 26.4%, up 3.8 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.