Bearish Sentiment Rebounds

By Charles Rotblut, CFA, AAII

The percentage of individual investors describing themselves as bearish rebounded by 8.5 percentage points to 44.4% in the latest AAII Sentiment Survey. Meanwhile, both bullish and neutral sentiment declined.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 4.2 percentage points to 28.7%. This is the seventh time in the past 12 weeks that optimism has been below 30%. It is also the 13th consecutive week that bullish sentiment has been below its historical average of 39%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 4.3 percentage points to 27.0%. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, jumped 8.5 percentage points to 44.4%. This is the 11th time in 12 weeks that bearish sentiment has been above its historical average of 30%.

This week’s changes brought pessimistic levels back to where they were near the start of June. We are continuing to see ongoing pessimism among individual investors about the short-term direction of stock prices. The current 13-week streak of below-average bullish sentiment is the longest since a 14-week stretch from December 20, 2007, through March 20, 2008. The current eight-week streak of above average bearish sentiment is the longest since a 14-week stretch from July 21, 2011, through October 20, 2011.

AAII members continue to be casting a wary eye toward events in Europe and are concerned about the slowing pace of economic growth in here in the United States.

This week’s special question asked AAII members what near-term catalyst would change their sentiment toward stocks. The largest number of respondents said some type of resolution to the European sovereign debt would be a positive catalyst. Other potential bullish catalysts included stronger U.S. economic growth, the outcome of the U.S. presidential election (respondents differed between whether a win by Mitt Romney or a President Obama would be a positive catalyst) and a resolution to the forthcoming expiration of tax cuts and the implementation of spending cuts (the so-called “fiscal cliff”).

Some members foresaw potentially negative catalysts. These members cited a worsening of the European sovereign debt crisis and slower economic growth in either the U.S. or China.

Here is a sampling of the responses:
“A solid plan to deal with the European crisis that member nations stand behind would be bullish for the market.”
“If Europe settles its government/bank liquidity problems, I would be more bullish.”
“More jobs being created in the United States would create an avalanche of buying in the market.”
“Even a partial compromise by Congress and the White House on closing the deficit would make me very bullish. I’m expecting that will occur when pigs fly.”
“A slowdown in the U.S. economy would make me somewhat more bearish over the short term.”

This week’s AAII Sentiment Survey results:
Bullish: 28.7%, down 4.2 percentage points
Neutral: 27.0%, down 4.3 percentage points
Bearish: 44.4%, up 8.5 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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