AAII Sentiment Survey: Pessimism Moves Closer To 50%

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

Summary

Pessimism edged up to nearly 50%; it was last higher in April 2013.

Bullish sentiment climbed slightly while neutral sentiment dropped below its historical average for the first time in 18 weeks.

Some members are actually viewing this downturn as a buying opportunity.

Pessimism about the short-term outlook for stocks moved closer to 50% in the latest AAII Sentiment Survey. Optimism improved a little, while neutral sentiment plunged to a five-month low.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 3.6 percentage points to 21.5%. The improvement comes after optimism had fallen to what was nearly an 11-year low last week. Bullish sentiment has now been below 30% for eight consecutive weeks, and has stayed below its historical average of 39.0% for 44 out of the past 46 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 6.8 percentage points to 29.8%. Neutral sentiment was last lower on August 27, 2015 (29.2%). The drop ends a streak of 18 consecutive weeks of readings above its historical average of 31.0%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 3.2 percentage points to 48.7%. Pessimism was last higher on April 11, 2013 (54.5%). Bearish sentiment has been above its historical average of 30.0% during five out of the last six weeks.

The very high level of pessimism and the very low level of optimism reflects the rough month stocks have experienced so far. The S&P 500 remains in a correction while small-cap stocks are in a bear market. Also playing a role are concerns about the slowing pace of economic growth in China, escalating tensions in the Middle East and frustration with the pace of economic growth in the U.S.

This week's bearish sentiment reading ranks among the 70 highest in the survey's history. Even with the improvement, this week's bullish sentiment ranks among the 60 lowest readings in the history of our survey. Unusually low levels of optimism have historically had a stronger association with above-average S&P 500 returns over the following six- and 12-month periods than unusually high levels of pessimism.

This week's special question asked AAII members what impact the market's weak start to 2016 has had on their six-month outlook for stock prices. More than four out of 10 respondents (42%) said this month's decline in stock prices has had a negative impact. The majority of these members anticipate further price declines, while some said that they are less/no longer optimistic or are now nervous or cautious. Nearly 17% of respondents said the decline has not had an impact on their outlook. Many of these respondents said the decline just confirms their view about market direction. About 16% of respondents describe the price decline in stock prices as having a positive impact on their expectations. These members either expect stock prices to be higher over the next six to 12 months or are looking to buy stocks at reduced prices.

Here is a sampling of the responses:

  • "I am becoming very defensive right now and am moving as much as I can into cash."
  • "I think the outlook is much better. Since stocks are 'on sale,' I am now buying (in small blocks)."
  • "Confirmed my down signals for a very tired bull market."
  • "Depressed my favorable outlook."
  • "Makes me a more wait-and-see investor."
  • "I view this weakness as temporary and six months from now, we will look back at it as a buying opportunity."

This week's AAII Sentiment Survey results:

  • Bullish: 21.5%, up 3.6 percentage points
  • Neutral: 29.8%, down 6.8 percentage points
  • Bearish: 48.7%, up 3.2 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 at 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.