AAII: OPTIMISM REBOUNDS

By Charles Rotblut, CFA, AAII

Bullish sentiment rose 2.1 percentage points to 35.6% in the latest AAII Sentiment Survey. This is the second consecutive weekly increase in optimism that stock prices will rise over the next six months. Despite the improvement, bullish sentiment remains below its historical average of 39% for the fourth week in a row.

Neutral sentiment, expectations that stock prices will be essentially unchanged over the next six months, rose 2.8 percentage points to 24.6%. This is the fifth 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, dropped 5.0 percentage points to 39.8%. This was the second consecutive weekly decrease in pessimism. Even with the drop, bearish sentiment is above its historical average of 30% for the 23rd time in 26 weeks.

The level of pessimism continues to pull back from the 2011 high recorded two weeks ago. Even with the improvement in optimism, a higher percentage of individual investors still expect stock prices to fall over the next six months than those who expect prices to rise. The recent volatility in the markets has created additional uncertainty. This is in addition to the problematic headline risk caused by the slow pace of economic growth and sovereign debt issues (both in the U.S. and in Europe). 

This week’s special question asked AAII members which sectors or industries they like right now. Energy was the overwhelming favorite. AAIImembers also expressed a preference for basic materials/commodities, health care, utilities and technology. Many explicitly said they were seeking out dividend-paying stocks.

When the same question was asked in late May, AAII members said they liked energy, health care and technology.

This week’s AAII Sentiment Survey results:

  • Bullish: 35.6%, up 2.1 percentage points
  • Neutral: 24.6%, up 2.8 percentage points
  • Bearish: 39.8%, down 5.0 percentage points

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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Comments

  1. TPC followers-(MG, Oplefty, Wantingtoretire, and mcghee)

    My process has come from making a whole lot of mistakes. I was not trained by the great Seth Klarman, David Winters, Mike Price etc. I found these people and their philosophy on investing after I had gotten burned by my Broker Dealer and Investment Bank early on. So my process has been shaped and forged by blood, sweat and tears. In fact..in 2008..I couldn’t sleep. I was up all night from July 08-Feb 09. Reading everything. We did real good in 08(what’s real good we lost our clients 13% conservative and 20% aggressive). I don’t think my clients think losing 200,000 on a million dollars deserves the fees they paid me. So I took alot of 2008 personal. I listend to hundreds of mutual funds, Wall St. etc. tell me in the beginning of 08 what turned out to be just bullish crap. They always dismiss everything. They have wonderful teams of marketers with graphs and charts showing you why everything you worry about…is not true.
    So I looked for answers. Did this also in 1998-2002. I’ve been doing this since 97. I read every book that I thought would help my clients. Read every website, signed up for every subscription.(do you know how much it costs for the Financial Times online? $275-$325..(i can’t totally remember)for a year. Add this onto all the other stuff.I paid it. I thought I needed it.
    My process is hard to write here. too long. But I want to be clear it came not from success but from getting kicked, beaten and bruised by Wall St. I figured stuff out…then figured more out…then more then more. And here I am. I KNOW WHAT DOESN’t WORK and WHEN. that is my biggest strength. I have tools(mutual funds, ETFs, Stocks etc.) and I know when to use them and when not to.
    So let me get to some questions. Which I can’t tell you how much I enjoy helping you…even if it’s something as simple as showing you a website of a someone you can trust or who will be a good steward for your family. THIS WEBSITE IS ONE OF THEM. I AM 100% CONVINCED IF YOU STICK AROUND HERE YOU WILL LEARN SOMETHING. WHEN CULLEN POSTS A PIECE AND YOU AGREE WITH IT…GO TO THAT PERSON WEBSITE AND READ MORE..AND MORE AND MORE..TAKE CONTROL OF YOUR INVESTMENTS. If you are not confident your doing the right thing. Please look me up here. there are other people here that can help you also. Now this isn’t an investment help website but at least there are readers that I have found will answer your questions.
    To that end. JJAborderly(spelling) at the valuation restoration project is so spot on and common sense. Guys like him are lighthouses that will save you from the rocks. Hussman, GMO also.
    Let’s get to it: These are my opinions: Not fact just my opinions.I believe we are in a Secular Bear Market which started in 2000. I beleive we will at some point get to valuations we experienced in 1921, 1932, 1949 and 1982. I believe along the way you will experience what we have. Down 50%(2000-2003)up 100% (2003-2007) down 50+% 2008-2009 up 105% 2009-2010 and now back down. This goes on until something triggers valuations to be so cheap that GMO posts 7 year projected returns around 13%-20% and Hussman posts on his site 10 year forward returns on the S&P to be north of 14%. And guess what…THEY will do just that. and similar to 1982-2000 YOU MUST…pretend I have a gun to your head and buy stocks.(trust me no one at that time will want them and everyone will tell you your an idiot) But you must..even if they go down the next 12 months. The risk is no longer there. Risk goes away when at the peak.
    So YES..I see fair value much lower. BUT..I have two pieces. One is a short term trading piece and the other is long term. The only funds I use for long term is the ones I have recommened to others. PRPFX-PAUIX-FPACX- HSTRX- DBLFX-
    Now each one has some risk. BUT..these are good stewards of you capital. They have a process, they go to cash, they increase allocation to bonds, stocks etc. they are trully managing your wealth. Do you load up on them..No. But it’s a great place to start. For example-I receive PAUIX-Rob Arnett(who I’ve met twice)updates of his holdings everymonth through Morningstar Principia pro. Every month it is different. One month..biggest holding is High grade corporates, then stocks then when the market was at 1350ish it was PSSAX-Pimcos short fund. I don’t want to sell you on anything. I just want you to know these funds are a place to start. At the very least you get access to great managers..managing and you can trully leave them alone long term. At the same token. I dont’ know that you whant to go all in. But looking at there track record now is not a horrible time for them. SO….two are bond funds. YOu can do ETFs also or actuall bonds. Interest rates will go up? Sure. Would I load up on Bond funds here? NO.
    Would I load up on Stock funds etc. here?NO…I trully believe if you go to these companies websites you can get a feel for what they do.
    No one can give you real time buy sell calls here. So these are good longer term holdings. But heres the thing….don’t think for one second your getting slighted or taking a second rate investemnt strategy. I have competed for investment business and accounts in the 250,000,000 and they were garbage. GARBAGE..I was appaled. I went into it feeling insecure but when I got the statements I couldn’t believe how BS the strategy was. I could tell you story after story of so called “wealthy” Ultra high net worth” “the smart money” accounts. I’ve seen them..it’s not true. I’ve said this before. MY peer manages close to 1.5 billion of the names of people you know in hollywood. And he uses PAUIX in his portfolios-7% and others. I’m not giving you second fiddle stuff. Look at the returns on these things. It is about what one persons needs. I want that to be clear. Private money managers vs. Mutual funds vs. ETFS…When I competed for this celebrities account of 225,000,000 of which we already had 35 million…I reviewed the other firms strategy and it was as vanilla as it comes. AND..I compared every private money manager to some of these funds and take out the fees and these funds were better. SO..don’t think someone knows more than you. There is no black box. Stay prudent and conservative now and then get aggressive when things sell off.
    Sell OFF: I believe we dip just under 1100 and retrace back up to 1230-1270 by year end. So I will be buying first around 1100 and then loading up if it goes to 1040ish. This sounds odd..BUT I HAVE TO. My process calls me to do it and unlike you I can’t afford to miss out if the market goes up and I under perform. I do have what’s called career risk. But I’m willing to hold cash..Now 57%. so Im much different then many out there. And my algos will tell me at that time buy. BUT..I do blieve GMO is right so 2012..well it’s a long way a way but..I will be raising cash if my target of 1230-1250 is hit. The market sends audibles often…QE…Eurpean banking crisis…Major GeoPolitical event(I can’t do anything about these..I’m as screwed as everyone else.I just hope I get lucky and have cash to buy 5-10 days later)
    Why not gold?
    There is no reason to not own it! When things are bad..it’s a safe haven..when it’s good it a buy, Every country is increasing demand, etc. etc.. Right now it is the most sure fire no lose investment. And every passing day it becomes more and more infallable, unstoppable, how could you not own it.
    Look—high oil prices are the best thing for high oil. Well high gold prices are the best thing to curb demand and the smart money wants to sell at top to you. It seems to me we are at that point. Now I have a 3 page piece from a service we use and they have been gold bugs and as of last week are no longer in that camp. They are smarter than I. But for 12 years your talking about an asset that is now up 625%+ the average bubble pops at around 1024%+ But think about this for one second…..how can an asset that is up over 600% be a safe haven?
    ARe you crazy? Is there any other asset ever that is up 600% that you would go into with your money as a safe place? NO…then why gold? because of China, because of our fed,..Europe will have to print.etc. etc. There is no reason you can lose. Does this sound familiar to anyone?
    All my clients want Gold…we are down to 5-8% and when I buy stocks at around 1040-1100…I will sell this last piece to rotate where I feel there is less risk and more reward.

    Lastly, FPACX- can not be bought in scwabb accounts I guess. substitute..You know I would use WGRNX-David Winters fund…BUT..it’s more market risk so I would be very patient in my purchases. YOu must Dollar Cost in to this one. You have to own him for 60 days or you get a 2% redemption fee so know that. The other one is the famous MALOX.
    And remember..this bad stuff and end of the U.S is your opportunity. You must get smart and figure out some good investments ETFs, MFs etc. to have ready when the market sells off. YOu must invest then…Look for Cullen or others you come to trust to give you more confidence on that buy. Also look at the Royce family of funds…when things get bad I will want to own more aggressive stuff like Royces offerings. We don’t own them now.

    If I could give you one piece of advice…READ hussman every Sunday. He did not do well in 2010 at all. But the last shall finish first and I think he always ends up being proven correct..but for my firm we had to implment short term timing pieces. We can’t wait for 2012-2015 when ever that 1982 moment actually happens. There are always opportunities…This site will give you alot of good ones.

    • VB,

      Thanks a lot! I started in 1992. We have similar experience sets. I am doing a lot of what you are doing, especially when it comes to overarching philosophy and strategic framework. I agree with the belief that we are in a secular bear, but have had massive cyclical bulls/ bears with more to come. I also believe that the current period is between two crises- we never treated the disease fully, just the symptoms. Is the Europe situation the next major “Lehman moment?” We shall see.

      I am really wrestling with the tactical side of this thing, i.e. when to make risk on/ risk off shifts.

    • Thanks for the practical insight. I always look forward to your comments. I especially appreciate the transparency regarding your trades. One thing, what technigue do you use to move in and out of cash – you were in and thinking it would go to around 1250 or so, but then made a perfect move and got out at 1180; how do you do that? Technical, gut, algo? Thanks again.

  2. Ay Vay..I just wrote an epistle for 45 min. and it just disappeared.

    i guess it was not meant to be. i’ll take that as a sign and respond individually.

    …..ay vay….what’s the yiddish word for FML?

    • VII aka V,

      Thanks for posting and advice….

      Let me summarize the essay (do not know if its a TPC record or not)

      1. You do still believe in the ‘buy and hold’ strategy for the ordinary investor as long as the buy and hold includes the funds that you have mentioned (PRPFX, HSTRX, DBLFX, FPACX, etc).

      2. Significant portion in cash currently. Use Buffett’s analogy “Buy when there is fear and sell when there is greed”.

      3. Did not get a sense from you re: international allocation? Any thoughts on that?

      Regards and thanks foor advise

      MG

  3. Thank you VII,

    Your piece is most instructive. Not so much for the funds you mention but the process you have been through and what you do now. I am still in the read everything I can phase. So giving pointers on people to read is great. There is only so much time to read so I am still in the process of finding the ones who think it through and have that expertise you mention. I do spend time watching how the markets react to political events, international as well as homegrown.

    What I like and value most of all in your piece is that it comes from someone who is doing it and is able to stand back at look at how you do it without making it sound as though the process is foolproof.

    Thanks once again, I very much appreciate it and I am glad your piece didn’t get lost.

    Wantingtoretire.

  4. VRB II Thank you very much for your in depth response. I have followed TPC for about 18 months and your postings are well thought out. As I mentioned before, your strategy seems cautious and practical. I think that’s what most INVESTORS strive for in advise. I was a buy and hold investors for 20 years. I went with the mainstream wisdom of stocks for the long term. Obviously, that strategy failed in 2008. I got burned with my overweight in stocks. So I decided to research the people ( Hussman, Granthman and Shilling etc) who predicted the 2008 collapse and see what they knew that the rest of the investing world didn’t. I’ve read as much on these three as possible. I find it almost impossible to make a valid counter argument to any of their insights. They always used Entensive data to support their forecasts. Your advice seems to go along with their assumptions. All three are seen as bears and I try to balance their views with the other side. I find it very difficult to believe the bull vision for the US economy and Market in the short term. If we are in a secular bar market , as you say, then my following of the bears is validated. No one likes to hear that the US economy is in the tank, but as Cullen has pointed out many times, you can’t discount all the data available and come up with a plausible scenario that says otherwise. The balance sheet recession with extract it’s pound of flesh no matter how much the Fed and the US govt say otherwise. Since 2008, I have lowered my investment return expectations and am focused more on preservation of capital until equities become more reasonable priced. In poker, there is a strategy know as , Tight / Aggressive. You play very tight with your stack until the odds are in your favor, then you become aggressive. That seems like a good investment strategy in today environment and goes along with your above comments. Thanks again for you time and thought.

  5. Sensible and practical advice V11.

    I would only add that a somewhat similar (in principle) and highly practical strategy is described by Mebane Faber in his book The Ivy Portfolio, which came from his peer-reviewed paper written in 2007 called ‘A quantitative approach to tactical asset allocation’. Google it, you can download it for free.

    The strategy is entirely transparent and uses straightforward diversification combined with a simple mechanical market timing methodology. The only requirement from an investor is the discipline to ignore emotion and opinion and follow simple buy / sell signals. The results, not just backtested over decades but over the past several years in real time, have been remarkable.

    Best of luck to all.

  6. VRB II Thank you very much for your in depth response. I have followed TPC for about 18 months and your postings are well thought out. As I mentioned before, your strategy seems cautious and practical. I think that’s what most INVESTORS strive for in advice. I was a buy and hold investors for 20 years. I went with the mainstream wisdom of stocks for the long term. Obviously, that strategy failed in 2008. I got burned with my overweight in stocks. So I decided to research the people ( Hussman, Granthman and Shilling etc) who predicted the 2008 collapse and see what they knew that the rest of the investing world didn’t. I’ve read as much on these three as possible. I find it almost impossible to make a valid counter argument to any of their insights. They always used extensive data to support their forecasts. Your advice seems to go along with their assumptions. All three are seen as bears and I try to balance their views with the other side. I find it very difficult to believe the bull vision for the US economy and Market in the short term. If we are in a secular bar market , as you say, then my following of the bears is validated. No one likes to hear that the US economy is in the tank, but as Cullen has pointed out many times, you can’t discount all the data available and come up with a plausible scenario that says otherwise. The balance sheet recession with extract it’s pound of flesh no matter how much the Fed and the US govt say otherwise. Since 2008, I have lowered my investment return expectations and am focused more on preservation of capital until equities become more reasonable priced. In poker, there is a strategy know as , Tight / Aggressive. You play very tight with your stack until the odds are in your favor, then you become aggressive. That seems like a good investment strategy in today environment and goes along with your above comments. Thanks again for you time and thought.