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Bullish sentiment fell to nearly a two-year low in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, plunged 8.0 percentage points to 22.2%. This is the lowest that optimism has been since August 26, 2010. It is also the 68th lowest bullish sentiment reading out of more than 1,300 weekly readings in the survey's history. Optimism has now been below its historical average of 39% for 16 consecutive weeks.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, rose 1.0 percentage point to 36.0%. This is an 11-week high for neutral sentiment. It is also the fourth time in five weeks that neutral sentiment is above its historical average of 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 7.1 percentage points to 41.8%. This is the 11th consecutive week and the 14th out of the last 15 weeks that bearish sentiment has been above its historical average of 30%.

The last time bullish sentiment was lower, August 26, 2010, the market reached a short-term bottom. Though very low bullish readings have been correlated with short-term term market rebounds, optimism among individual investors can stay at low levels for a period of time.

For example, bullish sentiment fell to 18.0% on August 17, 1990. Six months later on January 25, 1991, bullish sentiment was still low at 25.0%. Over that time period, the S&P 500 rose a mere 2.5%. Thus, while our survey has been correlated with market reversals, low bullish (or bearish) readings are not causal events.

This week's special question asked AAII members whether they thought the stock market overall is presently fairly valued, undervalued or overvalued. The votes were very close, with those describing the market as overvalued only slightly exceeding the number who said the market was undervalued or fairly valued. AAII members are split about whether fears about slowing economic growth and sovereign debt problems have been fully priced into the market.

Here is a sampling of the responses:

  • "Overvalued, because of sluggish U.S. economic growth, S&P earnings estimates are too high, reduced demand from Europe and China and the drag of federal debt."
  • "Overvalued, since earnings will be depressed going forward due to the trend in the worldwide economy."
  • "Fairly valued, given the overreactions to the fears about European debt and national and international economic growth."
  • "Fairly valued. While price-earning ratios are a little low, the election and European weakness provide increased uncertainty and fear."
  • "Undervalued based on historical price-earnings ratios."
  • "Undervalued. Everybody is scared to death."

This week's AAII Sentiment Survey results:

  • Bullish: 22.2%, down 8.0 percentage points
  • Neutral: 36.0%, up 1.0 percentage points
  • Bearish: 41.8%, up 7.1 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 Below Average For 15th Week