BEARISH SENTIMENT SURGES

By Charles Rotblut, CFA, AAII

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 5.8 percentage points to 24.4% in the latest AAII Sentiment Survey. This is the lowest level of optimism recorded since August 26, 2010. Bullish sentiment has now been below its historical average for eight consecutive weeks.

(Chart provided by pragcap.com)

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, plunged 8.5 percentage points to 27.9%. This is the first time in eight weeks that neutral sentiment has been below its historical average of 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, surged 14.2 percentage points to 47.7%. This is the highest level of pessimism since August 26, 2010. Bearish sentiment has now been above its historical average of 30% for 15 out of the last 16 weeks.

The continued decline in stock prices, combined with the weak May jobs data and ongoing gridlock in Washington, have frayed individual investors’ nerves. As a result, bearish sentiment is at historically high levels. On a statistical basis, this week’s reading is close to being an outlier. (Two standard deviations above the historical mean is 50.7%.) The spread between bullish and bearish sentiment is also unusually negative at -23.3%.

This week’s special question asked AAII members what market-related or economic catalysts they are looking for over the next few months. The U.S.federal debt ceiling and a plan for dealing with the U.S. federal deficit were cited by the largest number of respondents. The employment situation came in second. Respondents also noted actions by the Federal Reserve, other economic data (including housing) and the potential for further stock price weakness.

Here is a sampling of the responses:

  • “It is all political. If Congress can’t work together, nothing will improve.”
  • “What is Congress going to about the debt ceiling?”
  • “Jobs, jobs, jobs. If we don’t fix this, we will continue the downward spiral.”
  • “More jobs, less government spending, and Congress making some forward progress.”
  • “A bottoming of housing sales and a rise in new construction.”
  • “I want to see how the market interprets the end of QE2 (the latest round of quantitative easing by the Federal Reserve).”

This week’s AAII Sentiment Survey:

  • Bullish: 24.4%, down 5.8 percentage points
  • Neutral: 27.9%, down 8.5 percentage points
  • Bearish: 47.7%, up 14.2 percentage points

Historical averages:

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

 

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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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