AAII Sentiment Survey: 4 Out 10 Individual Investors Still Bearish

Includes: DIA, IWM, QQQ, SPY
by: AAII


Pessimism declined, but still remains high at 40%.

Bullish sentiment surged, but still remains below its historical average.

One in three members feels that stocks are currently overvalued.

Pessimism backed down from its nearly three-year high, but four out of 10 individual investors remain bearish in the latest AAII Sentiment Survey. Optimism jumped, while neutral sentiment rose slightly.

Bullish sentiment, expectations that stock prices will rise over the next six months, surged 8.2 percentage points to 29.8%. Though at a nine-week high, optimism is below its historical average of 39.0% for the 45th out of the past 47 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, edged up 0.5 percentage points to 30.3%. This is the first time neutral sentiment is below its historical average of 31.0% on consecutive weeks since December 25, 2014 through January 1, 2015.

Bearish sentiment, expectations that stock prices will fall over the next six months, pulled back by 8.7 percentage points to 40.0%. This is the first time pessimism has been at or above 40% on three consecutive weeks since October 18 through November 1, 2012. This is also the sixth time in the past seven weeks that bearish sentiment is above its historical average of 30.0%.

A stabilizing of stock prices over the past seven days likely helped to reduce the level of pessimism in our survey. Nonetheless, many individual investors still anticipate further declines. The slowing pace of economic growth in China, escalating tensions in the Middle East, the pace of economic growth in the U.S., the rate of earnings growth and prevailing valuations are all influencing investor sentiment. Though some individual investors view the current correction as a buying opportunity, optimism about the short-term direction of stock prices has not exceeded 30% since Thanksgiving.

The survey results were largely collected before the release of yesterday's Federal Open Market Committee statement.

This week's special question asked AAII members about their comfort level with the current valuation of stocks. Nearly one in three respondents (32%) said they view stocks as still being overvalued, somewhat high or are otherwise not comfortable with prevailing valuations. Many of these respondents don't think corporate earnings justify current valuations, while several others pointed to Robert Shiller's cyclically adjusted price-earnings (CAPE) ratio, which is at 24.0.

Conversely, 26% said stocks are undervalued or that they are comfortable with current valuations. Many of these respondents think the current drop has created a good buying opportunity.

Approximately 10% said valuations are reasonable or otherwise okay, while 5% said their perception of valuations depends on the stock or sector. A small group of respondents (4%) simply said they are anxious or nervous about current market conditions.

Here is a sampling of the responses:

  • "Given how much stocks have dropped, it's now time to buy."
  • "Way overvalued relative to the historical norms for the CAPE ratio."
  • "Depends on the stock. Some are still overvalued, while some are bargains."
  • "I am waiting to add more stocks, as I think this price level is still too high."
  • "Too high given poor prospects for earnings growth."
  • "I welcome the correction. Many great quality stocks are now on sale."

This week's AAII Sentiment Survey results:

  • Bullish: 29.8%, up 8.2 percentage points
  • Neutral: 30.3%, up 0.5 percentage points
  • Bearish: 40.0%, down 8.7 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.).

Want to weigh in? Take the survey yourself and see results 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.