AAII Sentiment Survey: Neutral Sentiment Rises, Sets A New Record

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

Summary

Neutral sentiment is on a record-setting streak, with 33 weeks above its historical average.

Optimism remains below its historical average for the 24th week in a row, the longest streak since 1993.

These numbers have historically been correlated with above-median S&P 500 returns.

Neutral sentiment's rise in this week's AAII Sentiment Survey kept it above its historical average for a record 33rd consecutive week. The previous record of 32 consecutive weeks was set last year. This week's rise in neutral sentiment occurred as both optimism and pessimism declined.

Bullish sentiment, expectations that stock prices will rise over the next six months, pulled back by 3.6 percentage points to 26.8%. The drop keeps optimism below its historical average of 39.0% for the 24th consecutive week, the longest such streak since a 29-week stretch in 1993.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rebounded by 6.4 percentage points to 39.8%. The rise keeps neutral sentiment above its historical average of 31.0% for a record 33rd consecutive week, as noted above. The previous record streak of 32 consecutive weeks was set between January and August of last year.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 2.8 percentage points to 33.3%. Even with the decline, pessimism is above its historical average of 30.0% for a fourth consecutive week. The last time bearish sentiment was last above its historical average on four consecutive weeks was between April 11 and May 2, 2013.

Bullish sentiment is back at an unusually low level. Such readings have historically been correlated with above-median returns for the S&P 500. (There is no guarantee that history will repeat, however.) Neutral sentiment is right at the top end of its typical historical range.

The record streak of above-average readings for neutral sentiment has occurred as the S&P 500 has been essentially flat for several months. According to Driehaus Capital Management, the S&P 500 fluctuated within a 4.44% range during the six-month period ended August 13, 2015. Driehaus describes this as the narrowest trading range on record.

Giving AAII members reasons for caution are concerns about the possibility of a sizable decline in stock prices occurring, the pace of economic growth, the lack of wage growth, valuations, the impact of the stronger dollar on earnings and geopolitical events. The lack of market breadth and ongoing daily volatility on are also playing a role. Keeping other AAII members optimistic is the Federal Reserve's still-accommodative monetary policy, the ongoing bull market, sustained economic expansion and earnings growth.

This week's special question asked AAII members what one thing about the current market environment they would change if they had a magic wand. We received a wide variety of answers, but were able to group the responses into broad categories. The largest group of respondents (21%) singled out the Federal Reserve, with many calling for either an increase in interest rates or clarity on the timing of the first rate hike. Equal numbers, about 13% per group, want a change in government policies or a change in market conditions. Those wanting a change in policies discussed the tax code, regulations (both for and against) and reducing the federal debt. Lower volatility was the most desired change in market conditions, though some members want prices to fall in order to reduce prevailing valuations. An additional 8% would like to see less short-term trading and thinking. China was cited by 9% of respondents with individual investors wanting stronger economic growth or a more freely traded yuan.

Here is a sampling of the responses:

  • "Get the first rate hike over with already. It's not as big of a deal as people make it out to be."
  • "Stop the large up and down action."
  • "I would like to see a realistic plan to balance the federal budget."
  • "Not allow China to manipulate their currency."
  • "Stabilization in crude oil prices, to that the oil industry might recover."
  • "I wish median P/E ratios were lower."

This week's AAII Sentiment Survey results:

  • Bullish: 26.8%, down 3.6 percentage points
  • Neutral: 39.8%, up 6.4 percentage points
  • Bearish: 33.3%, down 2.8 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.). The survey and its results are available online 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.