AAII Sentiment Survey: Bull-Bear Spread Tightest Since August 2016

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by: AAII

Summary

Bearish sentiment rose while optimism pulled back.

This narrowed the bull-bear spread to 0.7%, its lowest level since August 2016.

Members weighed in on their stock-picking criteria, citing attractive dividend yields and earnings growth among other factors.

The percentage of individual investors describing their short-term market outlook as "bearish" rose over last week, while optimism pulled back, according to the latest AAII Sentiment Survey. This change has now pushed the bull-bear spread (bullish sentiment minus bearish sentiment) to 0.7%, its tightest range since August 24, 2016.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 2.7 percentage points to 33.1%. Optimism was last lower on February 1, 2017 (32.8%). The historical average is 38.5%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 2.0 percentage points to 34.5%. Neutral sentiment was last lower on February 1, 2017 (33.0%), though neutral sentiment has been above its historical average for four consecutive weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 4.7 percentage points to 32.4%. Pessimism was last higher on February 1, 2017 (34.1%). This week's gain now puts bearish sentiment back above its average of 30.5%.

Since starting 2017 at 46.2%, bullish sentiment has pulled back by a cumulative 13.1 percentage points. Over the same period, neutral sentiment and bearish sentiment have risen by 5.9 and 7.2 percentage points, respectively. (The numbers are rounded.) All three of the indicators remain within their typical historical ranges.

U.S. markets pulled back slightly on Thursday, pausing after posting a series of records. The S&P 500 rose seven sessions through Wednesday, and has closed at new highs eight times in 2017. The week was off to a good start after the Commerce Department reported stronger-than-expected growth in retail sales in January and the Federal Reserve reported factory output increased last month. Additionally, the Labor Department said that a gauge of U.S. inflation rose to its highest annual level in nearly five years.

Federal Reserve Chair Janet Yellen spoke this week, stating that the central bank may raise rates at its upcoming meeting. Following Yellen's congressional testimony on Tuesday, Fed funds futures tracked by CME Group signaled a 22% chance that the Federal Reserve may raise rates at the next meeting on March 15, 2017 - almost double the probability before Janet Yellen's statements.

This week's special question asked AAII members about the most important qualities/characteristics they look for in a stock they wish to buy, and why. Roughly 22% of respondents said that they look for an attractive dividend yield or an increasing dividend payment. Approximately 12% of respondents said that they look for strong earnings growth, while 9% look for a low P/E ratio compared to historical averages. Most members mentioned several items at a time. Other factors considered included positive momentum, a strong balance sheet, solid revenue growth, strong cash flow, and analyst ratings and recommendations.

Here is a sampling of the responses:

  • "Consistently increasing dividend over 12 years, earnings positive past 3 years and forecasted growth in the future, P/E ratio of 13.0 or less, continuous innovation and a payout ratio of 60% or less."
  • "Industry or sector, quality of the company and its financials (moat effect), P/E ratio, dividend yield, and other factors like debt, free cash flow, balance sheet strength, growth rates and price-to-sales (P/S) ratio."
  • "Low P/E ratio and a dividend yield of at least 3%."
  • "Large value stocks with a long history of raising dividends. In market downturns, stocks with good dividends improve overall return."
  • "Revenue and earnings growth."
  • "Low P/E ratio, price momentum and earnings growth."

This week's AAII Sentiment Survey results:

  • Bullish: 33.1%, down 2.7 percentage points
  • Neutral: 34.5%, down 2.0 percentage points
  • Bearish: 32.4%, up 4.7 percentage points

Historical averages:

  • Bullish: 38.5%
  • Neutral: 31.0%
  • Bearish: 30.5%

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.

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