Investor Confidence Remains Below Historical Average

by: John Scherr

This week's Confidence Survey results from

  • Bullish: 28.2%, down 13.1 points
  • Neutral: 26.9%, up 24.2 points
  • Bearish: 44.9%, down 11.2 points

Long-term averages:

  • Bullish: 36%
  • Neutral: 31%
  • Bearish: 33%

Markets Confidence Survey Highlights:

Bullish confidence dropped 13.1% percentage points to 28.2% in the latest WhisperNumber Confidence Survey. The percentage of individual investors expecting stock prices to rise over the next three months fell below the four year historical average of 35.8% for the sixteenth time in the past 23 weeks (70% of 23 surveys).

Neutral confidence, expectations that stock prices will stay essentially flat over the next three months, jumped 24.2 percentage points higher to 44.9%. The 52 week high of 46.2% was seen in the August 17 survey. This is only the sixth neutral reading out of the past year where neutral confidence stayed above 40%.

Bearish confidence, expectations that stock prices will fall over the next three months, moved 11.2 percentage points lower to 26.9%. Bearish confidence has been below its four year historical average of 33% in six of the past nine weeks.

Over the past few weeks members continue to have a limited but positive short-term outlook for stocks. This is particularly evident in the bull-bear spread (bullish confidence minus bearish confidence), which is positive for the fifth consecutive week. This comes off the heels of 12 out of 13 weeks of negative spreads. Optimism has been cautious as concerns about the economy, recent earnings reports, the U.S. election, and (of course) the European sovereign debt weigh on individual investors' moods.

Longer term (one year out) investors remain slightly market optimistic. Long term market confidence moved 9.4 percentage points higher to 64.9%. This reading has remained below its four year historical average of 61.5% for four out of the past six weeks.

The majority of investors (61%) are confident that buying common stocks is the best long term place to invest money. This is a 12 percent decrease from last week's survey. Cash and bonds remain at the bottom of the list for investors when it comes to investment categories that will provide the greatest percentage return over the next three to five years.

Confidence continues to indicate oversold markets for the Russia (NYSEARCA:RSX) and Japan (NYSEARCA:EWJ) regions. Oversold sector readings include Basic Materials (NYSEARCA:IYM), Services (NYSEARCA:RTH), and the Internet (HHHYL). The TIPS bond (NYSEARCA:TIP) market reading remains in an oversold market trend.

This week we gained two new long position (oversold market) readings in the Transportation sector (NYSEARCA:IYT) and the Treasury Bond (NYSEARCA:IEI) market. Since the readings were gained IYT is up while IEI is flat.

To view the full report click here.

For the past eight years has conducted financial markets confidence surveys. The surveys run every Thursday (8am ET) through Friday (9pm ET). On average, each survey receives responses from over 750 individuals. Respondent's consider themselves active investors and traders, and the survey covers the US major markets, global markets, sectors, ETFs, bonds, metals market, and CRB index.

We believe the following two statements best summarize market confidence data:

  • When market confidence reaches an 'extreme high', it signifies the last buyer has bought. As the market no longer has any buyers, prices can only go down.
  • When market confidence reaches an 'extreme low', it signifies the last seller has sold. As the market no longer has any sellers, prices can only go up.

We look to see where the 'herd' is headed, and take the opposite route. The 'herd' (in this case actual investors) are usually chasing a market higher or lower. In some cases chasing the market does yield positive results, but in most cases chasing a market ends up in losses. Analysis of our data concluded we were taking a snapshot of sentiment that indicated the opposite of actual market moves. Thus, it required contrarian interpretation in order to be accurate.

Disclosure: I 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.