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Both optimism and pessimism about the short-term direction of stock prices were near their historical averages in this week's AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 2.8 percentage points to 40.2%. Even with the drop, this marks the third time in four weeks that bullish sentiment is above its historical average of 39%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined 1.8 percentage points to 30.2%. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rebounded 4.6 percentage points to 29.6%. Even with the increase, pessimism stayed below its historical average of 30% for the second consecutive week.

This is the first time since July 2011 when we have had consecutive weeks of above-average bullish sentiment and below-average bearish sentiment. Though marking an improvement in attitudes to toward the market, it is important to note that both readings are very close to their historical averages. The ongoing European debt crisis, slow domestic economic growth and frustration with Washington politics are all keeping individual investors cautious.

This week's special question asked AAII members how the developments with European sovereign debt are affecting their sentiment toward stocks. The majority of respondents said that the situation in Europe was having a negative impact, that they were avoiding European stocks, or both. Several members expressed an aversion to foreign stocks, echoing comments made in last month's AAII Asset Allocation Survey. A few members, however, said they were finding opportunities in emerging market securities.

Here is a sampling of the responses:

  • "European sovereign debt will incur more uncertainty and will negatively affect the U.S. and global markets, especially the European markets."
  • "The problems are still not resolved in my opinion. So, I'm staying away from Europe."
  • "I stay away from global stocks. I do invest in U.S. companies that have a global reach."
  • "I am staying with what I currently own; I'm not taking new positions or adding to those already in the portfolio. The European Union has not dealt with Italy, Spain, Portugal or Ireland."
  • "Scare stories from Europe are providing opportunities to invest in global stocks, which are cheap—especially emerging market stocks."

This week's AAII Sentiment Survey results:

  • Bullish: 40.2%, down 2.8 percentage points
  • Neutral: 30.2%, down 1.8 percentage points
  • Bearish: 29.6%, up 4.6 percentage points

Historical Averages:

  • Bullish: 39%
  • Neutral: 31%
  • Bearish: 30%

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

Charles Rotblut. CFA is a Vice President with the American Association of Individual Investors and editor of the AAII Journal.

Source: AAII Sentiment Survey: Optimism, Pessimism Near Their Historical Averages