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Bullish sentiment is near a two-year low in the latest AAII Sentiment Survey, while bearish sentiment has spiked by 17.5 percentage points over the past two weeks.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 1.8 percentage points to 23.6%. This is the lowest level of optimism recorded in the survey since August 26, 2010. This is also the seventh consecutive week that bullish sentiment has been below its historical average of 39%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 2.1 percentage points to 30.4%. This is the just the second time in the past eight weeks that neutral sentiment has been below its historical average of 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 3.9 percentage points to 46.0%. This is the highest level of pessimism recorded by the survey since September 29, 2011. This is also the sixth consecutive week that bearish sentiment has been above its historical average of 30%.

The difference between bullish and bearish sentiment, the bull-bear spread, widened to -22.4 points. This is the most negative the bull-bear spread has been since September 22, 2011.

Bullish sentiment is unusually low, but it would have to fall below 18% to be considered extraordinarily low (two standard deviations below average). Similarly, bearish sentiment above 50% or a bull-bear spread below -29 points would be more correlated with market reversals. Last year, bearish sentiment topped 46% three times during August and September.

The two-week decline in stock prices, renewed uncertainty about Europe, and signs of slower U.S. economic growth have combined to fray the nerves of individual investors. The 17.5 percentage point rise in bearish sentiment over the past two weeks shows that many investors are second-guessing their prior short-term outlooks.

This week's special question asked AAII members if they are concerned that a repeat of last year's market correction could occur this summer. The overwhelming majority of respondents said that yes, they are concerned that a correction will occur. Most of them cited Europe as the primary problem. The minority of respondents who were not concerned either thought that the negative headlines were mostly priced in or are planning to buy stocks on any summer decline.

Here is a sampling of the responses:

  • "I feel like the issues in Greece, France and Spain are going to cause an economic downturn here in the United States."
  • "Yes, my primary concern is Europe and its unsettling influence on the U.S. markets."
  • "Yes, I'm concerned because of the European banking crisis, particularly Spain and the possibility of a Greek default."
  • "I'm concerned about it, but I think there's good a chance that the market is recovering, albeit with a bumpy ride."
  • "No, I'm not concerned because if it does recur like last year, August-September could become a likely timeframe to buy into stocks."

This week's AAII Sentiment Survey results:

  • Bullish: 23.6%, down 1.8 percentage points
  • Neutral: 30.4%, down 2.1 percentage points
  • Bearish: 46.0%, up 3.9 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: Bullish Sentiment Near A 2-Year Low