Bullish sentiment soared to an 11-month high in the latest AAII Sentiment Survey. Bearish sentiment plunged to levels not seen since December 2010.
Bullish sentiment, expectations that stock prices will rise over the next six months, jumped 8.3 percentage points to 48.9%. This is the highest level of optimism since February 10, 2011. It is also the third time in the past four weeks that bullish sentiment has been above its historical average of 39%.
Neutral sentiment, expectations that stock prices will remain essentially unchanged over the next six months, rose 5.4 percentage points to 34.0%. This is the second time in three weeks that neutral sentiment has been above its historical average of 31%.
Bearish sentiment, expectations that stock prices will fall over the next six months, plunged 13.7 percentage points to 17.2%. This is the lowest level of pessimism since December 23, 2010. It is also more than one standard deviation below the historical average of 30%, making this an unusually low reading.
AAII members are starting the New Year with optimism about the short-term direction of stock prices. Whether this positive outlook holds remains to be seen, as many individual investors are concerned about the slow pace of economic growth, Washington politics and the European sovereign debt crisis. There has been a gradual improvement in individual investors’ outlook, however, with bullish sentiment posting above-average readings during eight out of the past 13 weeks, after having stayed at below average levels for 27 out 33 weeks.
This week's special question asked AAII members whether large-cap, mid-cap, small-cap or micro-cap stocks will perform best this year. The majority of respondents said large-cap stocks, especially those that pay dividends, will deliver the best returns. Mid-cap stocks were a distant second, followed by small-cap stocks.
Here is a sampling of the responses:
- "We're in a negative environment where investors feel more comfortable in bigger companies with stability. Those stocks that pay dividends will be in favor."
- "Large-cap stocks due to their global reach and dividends; people view them as safe."
- "Large-cap stocks. Dividends and safety matter. Exposure to emerging markets can be attained through high-quality large-cap stocks."
- "Mid-cap stocks. They have better growth than small caps since they have more access to capital. Large caps still need the global economy to be more robust."
- "Small- and micro-cap stocks, because they are the most undervalued and usually lead the market in an economic recovery."
This week's AAII Sentiment Survey results:
- Bullish: 48.9%, up 8.3 percentage points
- Neutral: 34.0%, up 5.4 percentage points
- Bearish: 17.2%, down 13.7 percentage points
- 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 here.