Optimism about the short-term direction of the stock market exceeded 44% for the first time since last December, according to the latest AAII Sentiment Survey. Both neutral sentiment and bearish sentiment continued to fall.
Bullish sentiment, expectations that stock prices will rise over the next six months, jumped 5.2 percentage points to 44.7%. This is the highest level of optimism recorded by our survey since December 26, 2013 (55.1%). The historical average is 39.0%.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 4.2 percentage points to 34.1%. Though at a three-month low, neutral sentiment remains above its historical average of 30.5% for the 23rd consecutive week.
Bearish sentiment, expectations that stock prices will fall over the next six months, declined 1.0 percentage points to 21.3%. The drop puts pessimism below its historical average of 30.5% for the eighth straight week.
The spread between bullish and bearish sentiment (the "bull-bear spread") widened to 23.4 percentage points. This is the largest bull-bear spread since December 26, 2013 (36.5 percentage points).
During the past three weeks, bullish sentiment has risen by a cumulative 14.3 percentage points and the bull-bear spread has widened by a cumulative 19.4 percentage points. Though both readings are high relative to what we have seen this year, they remain within the typical ranges recorded throughout the survey's history.
The record highs established by the S&P 500 as well as rebounding prices among other groups of stocks, including biotechs and small-caps, are likely playing a key role in boosting optimism among individual investors. Also helping are continued signs of economic expansion, the Federal Reserve's tapering of bond purchases and low interest rates. Offsetting this optimism are concerns about elevated valuations, the pace of economic expansion, Federal Reserve's tapering and frustration with Washington politics.
The June AAII Journal features a new historical analysis of the AAII Sentiment Survey. The analysis found a link between above-average six- and 12-month gains in the S&P 500 following unusually high neutral sentiment readings and unusually low bullish sentiment readings.
This week's special question asked AAII members how, if at all, they have recently adjusted their stock investing strategy. Slightly less than one out of every four respondents (23%) said they have not made any recent changes. Equal numbers of respondents (20%) said they have shifted more into large-cap or value stocks. About 13% of respondents said they have increased their cash allocations.
Here is a sampling of the responses;
- "I am looking at value more than growth-oriented stocks."
- "I continue to invest with the same asset allocation plan, regardless of whether it is a bull or a bear market."
- "I stopped buying because everything is overpriced."
- "No significant alteration, although I have taken some profits and kept the proceeds in cash in lieu of the present elevated level of the market."
This week's AAII Sentiment Survey results:
- Bullish: 44.7%, up 5.2 percentage points
- Neutral: 34.1%, down 4.2 percentage points
- Bearish: 21.3%, down 1.0 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: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.