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Bearish sentiment spread among individual investors to an unusually high level, while bullish sentiment deteriorated in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 0.6 percentage points to 27.4%. This is the tenth consecutive week that optimism has been below its historical average of 39%. The current bullish sentiment reading is more than one standard deviation below the long-term average.

Neutral sentiment, expectations that stock prices will stay essentially unchanged, declined 3.2% to 26.8%. This is the fourth consecutive week that neutral sentiment has been below its historical average of 31%. It is the lowest neutral reading since December 15, 2011.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 3.8 percentage points to 45.8%. This is the eighth time in the past nine weeks that pessimism has been above its historical average of 30%. It is the second week in row that bearish sentiment exceeded the long-term average by more than one standard deviation.

The spread between bullish and bearish sentiment, the bull-bear spread, widened to -18.4 percentage points. This is the fourth negative double-digit spread in the past five weeks.

This week's special question asked AAII members if they have become more aggressive in their investing, are investing more conservatively, or stayed at about the same risk level relative their investing profile six months ago.

Just over half of our members (51%) indicated that they were taking on less risk, investing more conservatively than six months ago. These investors are concerned about the potential of a stalling U.S. economy, the risk of a budget showdown and sequestration during an election year, and the European financial crisis and its impact on our markets and economy.

One-third of our respondents (33%) noted that they were taking on about the same amount of risk with their portfolio as they did six month ago. Many of these investors felt confident in their financial plan and are sticking with their asset allocation.

Only 16% of the respondents in the survey indicated that they were taking on more risk and investing more aggressively today compared to six month ago. These investors feel that stocks offer the best opportunity today, with an environment of low interest rates. They are buying good-quality companies as share prices decline. They are looking for bargains now that stocks are on sale. One member even quoted Baron Rothschild, who said that you should "Buy when there is blood in the streets."

Here is a sampling of the responses:

  • "Less risk for now. Nothing is going to get resolved in D.C. until the election. The risk of a short-term budget showdown in a lame duck Congress is too great."
  • "Extremely more conservative: Europe is about to blow, the U.S. economy is about to stall, the market is sending out bearish signals."
  • "Less risk for the summer. Market will likely enter bear territory in the summer before reversing and finishing the year higher."
  • "A slow and steady investment in good companies has worked well enough, no need to change."
  • "I'm sticking to my asset allocation model."
  • "As a long-term investor, I continue to buy common stocks on dips in the market."

This week's AAII Sentiment Survey Results:

  • Bullish: 27.4%, down 0.6 percentage points
  • Neutral: 26.8%, down 3.2 percentage points
  • Bearish: 45.8%, up 3.8 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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: AAII Sentiment Survey: Pessimism Remains Dominant Emotion