AAII: BULLISH SENTIMENT AT A 4 WEEK HIGH

By Charles Rotblut, CFA, AAII

Bullish sentiment slightly improved in the latest AAII Sentiment Survey. The percentage of individual investors who expect stock prices to rise over the next six months edged up 0.9% to a four-week high of 36.4%. The historical average is 39%.

Neutral sentiment, expectations that stock prices will be essentially unchanged over the next six months, fell 2.0 percentage points to 22.6%. This is the sixth consecutive week that neutral sentiment has been below its historical average of 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rebounded by 1.1 percentage points to 41.0%. This is the 24th time in 27 weeks that pessimism has been above its historical average of 30%.

Bearish sentiment has been at or above 41% during three out of the last four weeks, equaling or exceeding one standard deviation above the average. This puts pessimism at high, but not excessive levels. The numbers show continued uncertainty on the part of individual investors about where stock prices are headed. Market volatility, the slow pace of economic growth and sovereign debt concerns (both in the U.S. and in Europe) are all playing a role. The increase in bullish sentiment, however, shows that some individual investors believe that the selling pressure has made the prices of certain stocks attractive.

This week’s special question asked AAII members what, if anything, they have done in reaction to this month’s volatility. Answers varied, though the largest number of respondents said they bought stocks. The second-most common response was that individual investors are looking for bargains among stocks. Making no changes to came in third. A small number said they either sold stocks or were holding more cash (with proceeds coming from the selling of stocks, bonds, gold or short positions).

Here is a sampling of the responses:

• “Yes, I bought some stocks. I like things on sale!”
• “I’ve picked up a couple of bargains and am considering adding to my long-term holdings.”
• “I have taken advantage of the drop in prices to execute buys for stocks on my watch list. For many of these buys, the dividend yield is at 5%.”
• “Not much. I’ve looked for bargains and nibbled at one, but I am still waiting for better valuations to come.”
• “I have paid less attention to the markets and done nothing with my holdings. I am confident that stocks will rebound strongly later this year.”
• “I’ve gotten out of stocks and am battening down the hatchets.”

This week’s AAII Sentiment Survey results:

• Bullish: 36.4%, up 0.9
• Neutral: 22.6%, down 2.0
• Bearish: 41.0%, up 1.1

Historical Averages:

• Bullish: 39%
• Neutral: 31%
• Bearish: 30%

Charles Rotblut

Charles Rotblut, CFA, is a vice president of the American Association of Individual Investors. He is the editor of the AAII Journal. He authors the weekly AAII Investor Update e-newsletter and his commentary is published on both Seeking Alpha and Forbes.com.

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