AAII Sentiment Survey: Pessimism Rebounds Strongly

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Includes: DIA, IVV, SPY, VOO, VTI
by: AAII

Summary

Pessimism surged, but only to a three-week high.

Neutral sentiment pulled back from its 13-year high, hit last week.

The rough start to 2016, China and escalating tensions in the Middle East are impacting individual investors' short-term outlook.

Pessimism about the short-term direction of stock prices rebounded strongly as neutral sentiment pulled back from a 13-year high in the latest AAII Sentiment Survey. Bullish sentiment fell, extending its streak of unusually low readings.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 2.9 percentage points to 22.2%. Optimism was last lower on July 29, 2015 (21.1%). Bullish sentiment has now been below 30% for six consecutive weeks and is below its historical average of 39.0% for 42 out of the past 44 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, pulled back by 11.7 percentage points to 39.6%. The large drop follows last week's jump to 51.3%, which was the highest reading since February 6, 2003 (51.4%). Neutral sentiment is above its historical average of 31.0% for the 17th consecutive week. Last year, neutral sentiment was above average every week except for two.

Bearish sentiment, expectations that stock prices will fall over the next six months, rebounded by 14.6 percentage points to 38.3%. The jump follows last week's large drop to 23.6%, but only puts pessimism at a three-week high. Bearish sentiment has been above its historical average of 30.0% during three out of the last four weeks.

Optimism is at an unusually low level for the fourth consecutive week. Unusually low levels of bullish sentiment (defined as being more than one standard deviation below the historical average) have historically been associated with above-average returns for the S&P 500 over the following six- and 12-month periods. There is no guarantee that history will repeat, however.

The rough start to 2016, China and escalating tensions in the Middle East are all impacting individual investors' short-term outlook. The above-average and often high levels of neutral sentiment recorded last year occurred during what was a mixed year for the major indexes, with more S&P 1500 Super Composite stocks falling rather than increasing in price.

During the week before Christmas, we asked AAII members for their thoughts about the Federal Reserve's recent rate hike. More than 37% of respondents agreed with or approved of the rate hike. Nearly 29% said it was either about time to raise rates or that the rate hike was overdue. About 13% view the decision as a non-event, while 11% think the decision is a mistake.

Over the holidays we asked AAII members how big a percentage gain or loss the S&P 500 would realize this year. Nearly two-thirds of respondents (65%) anticipate stocks to rise. Slightly more than 20% of respondents think that the increase will be less than 5%, while 31% expect gains of between 5% and 10%. Nearly 29% of respondents expect declines. About 13% think that the market will fall between 5% and 15%, while 6% fret that the S&P 500 could plunge by more than 20% this year.

This week's special question asked AAII members what they thought would most influence the direction of stock prices this year. China and geopolitics (primarily events in the Middle East) topped the list, with each named by 22% of respondents. Politics, particularly the November elections, and the economy (both domestically and globally) followed closely behind, with 20% of respondents listing either or both. Slightly more than 11% cited corporate earnings, while just 8% said that monetary policy will have the biggest impact. Many respondents listed more than one primary influence.

This week's AAII Sentiment Survey results:

  • Bullish: 22.2%, down 2.9 percentage points
  • Neutral: 39.6%, down 11.7 percentage points
  • Bearish: 38.3%, up 14.6 percentage points

Historical averages:

  • Bullish: 39.0%
  • Neutral: 31.0%
  • Bearish: 30.0%

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.).

Want to weigh in? Take the survey yourself and see results online here.

Disclosure: I/we 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.