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Bullish sentiment, expectations that stock prices will rise over the next six months, rose 7.0 percentage points to 50.9% in the latest AAII Sentiment Survey. This is the highest level of optimism since August 13, 2009. The historical average is 39%.

Neutral sentiment, expectations that stock prices will remain essentially flat, rose 0.3 percentage points to 24.9%. The historical average is 31%. Neutral sentiment has been below its historical average for 10 out of the last 11 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 7.4 percentage points to 24.3%. This is the lowest level of pessimism since December 31, 2009.

This was the third consecutive week that bullish sentiment has made a big increase. Since falling to 20.7% on August 26, bullish sentiment has rebounded by approximately 30 percentage points. At the same time, bearish sentiment has plunged by approximately 25 percentage points.

Two factors are at play. The first is the market’s recent rebound. The rise in stock prices is giving some investors hope that a short-term bottom in the market has been formed. The second is the reduction in chatter about potential deflation and a double-dip recession. Though the economic data has not been great, it has been good enough to give some assurance that recovery is continuing.

Nonetheless, individual investors’ confidence in the market remains fragile. Should stock prices begin to weaken again or the economic data disappoint, bearish sentiment could rise.

This week’s special question asked AAII members about whether stocks now offer more long-term reward or risk. Though the majority of respondents thought stocks will provide more reward over the long term, many expressed concern that the level of risk is still too high. Uncertainty about the November election was expressed as a common theme affecting outlooks.

Here is a sample of the responses:

  • "There is more potential reward. Stocks are selling at historically low multiples. Growth stocks are priced like value stocks."
  • "I believe that stocks are a better option at this time. There is still a fair amount of risk in fixed income, either from inflation or interest rate increases."
  • "I think the upcoming election will be a major factor in the long term."
  • "There are too many political events occurring during the next six months to be sure."
  • "There is still risk until we get improvement in the jobs numbers."

This week's AAII Sentiment Survey Results:

  • Bullish: 50.9%, up 7.0 percentage points
  • Neutral: 24.9%, up 0.3 percentage points
  • Bearish: 24.3%, down 7.4 percentage points

Historical averages:

  • Bullish: 39%
  • Neutral: 31%
  • Bearish: 30%
Source: AAII Weekly Sentiment Survey: Bullish Sentiment Crosses 50% Threshold