Pessimism among individual investors about the short-term direction of the stock market is at its highest level in nearly two months, according to the latest AAII Sentiment Survey. Neutral sentiment fell, while optimism declined slightly.
Bullish sentiment, expectations that stock prices will rise over the next six months, declined 0.7 percentage points to 44.8%. Optimism was last lower on December 7, 2017 (36.9%). Even with the decline, bullish sentiment remains above its historical average of 38.5% for the eighth consecutive week.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, pulled back by 4.0 percentage points to 26.5%. Neutral sentiment remains below its historical average of 31.0% for the ninth consecutive week.
Bearish sentiment, expectations that stock prices will fall over the next six months, rose 4.7 percentage points to 28.8%. Pessimism was last higher on December 7, 2017 (34.2%). This week’s increase is not large enough to prevent pessimism from staying below its historical average of 30.5% for an eighth consecutive week.
Pessimism has rebounded by a cumulative 7.4 percentage points over the past two weeks. Some reaction to Monday’s and Tuesday’s volatility was captured in this week’s survey. On the other hand, the current streak of bullish sentiment readings in excess of 40% is the longest in a year. Optimism stayed above 40% for nine consecutive weeks between November 16, 2016, and January 12, 2017.
Some individual investors are encouraged by the record highs for the major indexes, the tax cuts and/or the Federal Reserve’s decision to continue raising interest rates at a gradual pace. Other individual investors are concerned about the possibility of a pullback or a more severe drop occurring. Even many investors who are optimistic about the overall direction of stocks expect a return of volatility this year. Also affecting investor sentiment are the perceived high levels of individual and institutional investor sentiment, earnings growth, economic growth, valuations and the lack of volatility. Washington politics remain at the forefront of many individual investors’ minds.
This week’s special question asked AAII members how the market’s ongoing lack of volatility is affecting their sentiment toward stocks. The question was posted last Thursday and responses, which were mixed, were gathered through yesterday. More than a third of respondents (36%) say the market’s relative calm and/or sustained upward rise has made them more cautious or is leading them to anticipate a forthcoming drop in prices. Conversely, approximately 21% of respondents say the market’s relative calm and sustained upward trend is reason to be optimistic. Nearly 28% of respondents say the current level of volatility is not affecting their sentiment toward stocks.
Here is a sampling of the responses:
- “Low volatility and high valuations are a sign for a major pullback on the horizon.”
- “It makes me feel that stocks are less risky.”
- “No effect. I know the market will be more volatile at some point. That just means there will be more buying opportunities.”
- “Bearish. I believe stocks are overpriced and cannot continue to stay as bullish as they are currently are.”
- “No change. I plan allocations for five years out.”
This week’s AAII Sentiment Survey results:
- Bullish: 44.8%, down 0.7 percentage points
- Neutral: 26.5%, down 4.0 percentage points
- Bearish: 28.8%, up 4.7 percentage points
- Bullish: 38.5%
- Neutral: 31.0%
- Bearish: 30.5%
The AAII Sentiment Survey has been conducted weekly since July 1987. The survey and its results are available online.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.