By Charles Rotblut, CFA, AAII
Bearish sentiment rose to a seven-month high, while bullish sentiment fell to an eight-month low in the latest AAII Sentiment Survey.
Bullish sentiment, expectations that stock prices will rise over the next six months, plunged 10.0 percentage points to 25.4%. This is the lowest level of optimism recorded by the survey since September 22, 2011. This is also the sixth consecutive week that bullish sentiment has been below its historical average of 39%.
Neutral sentiment, expectations that stock prices will fall over the next six months, fell 3.6 percentage points to 32.5%. This is a four-week low. Nonetheless, neutral sentiment is above its historical average of 31% for the fourth consecutive week and the sixth out of the past seven weeks.
Bearish sentiment, expectations that stock prices will fall over the next six months, jumped 13.6 percentage points to 42.1%. This is the highest level of pessimism recorded by the survey since October 6, 2011. It is also the fourth time in the past five weeks that bearish sentiment has been above its historical average of 30%.
Bullish sentiment is at an unusually low level, and bearish sentiment is at an unusually high level. In quantitative terms, both readings are more than one standard deviation from their historical norms. Last year, bearish sentiment exceeded 44% five times between August and October. Thus, though pessimism is unusually high, it is not high enough to be correlated with a forthcoming market reversal. A bearish sentiment reading above 50% would be a stronger contrarian signal.
Disappointing April employment data, the French presidential election, and a return of downside market volatility combined to fray individual investors’ nerves. The continuing above-average level of neutral sentiment, however, shows that there is an ongoing push and pull of bullish factors (e.g., improved corporate profits, U.S. economic growth) and bearish factors (concerns about the pace of growth, Europe, high gas prices, etc.).
This week’s special question asked AAII members what, if any, impact the current uncertainty about 2013 tax rates is having on their outlook for stocks. The majority of respondents said it was not impacting their outlook. Several members, however, thought the possibility of higher taxes next year is a negative factor.
Here is a sampling of the responses:
- “I don’t expect taxes to change much, and there will be little impact on the economy.”
- “None. Huge tax increases are politically unlikely.”
- “None. I’m reasonably certain the dysfunctional idiots in Congress will agree on a fix at two minutes to midnight, as they usually do.”
- “A very big uncertainty. It will drive decisions in the near-term to best take advantage of taxes.”
- “The perceived outcome of the election will have a sizeable impact on the market because of its implications for tax policy.”
This week’s AAII Sentiment Survey results:
- Bullish: 25.4%, down 10.0 percentage points
- Neutral: 32.5%, down 3.6 percentage points
- Bearish: 42.1%, up 13.6 percentage points
- Bullish: 39%
- Neutral: 31%
- Bearish: 30%