Bullish Sentiment Declines Marginally

By Charles Rotblut, CFA, AAII

Neutral sentiment rose to a four-month high, as both optimism and pessimism declined in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, declined 0.5 percentage points to 42.3%. This is the third consecutive week optimism has declined. Nonetheless, bullish sentiment is above its historical average of 39% for the sixth consecutive week and the 11th out of the last 12 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 1.3 percentage points to 29.0%. This is the highest neutral sentiment has been since October 11, 2012. Even with the increase, neutral sentiment is below its historical average of 30.5% for the 18th consecutive week and the 20th in the past 22 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, declined 0.8 percentage points to 28.7%. This is the ninth time in 10 weeks that pessimism is below its historical average of 30.5%.

Since setting a two-year high of 52.3% three weeks ago, bullish sentiment has fallen by a cumulative 10 percentage points. The decline reflects both a concern that stock prices may have risen too much since last November and a reversion to the mean in the survey’s results. Many AAII members are still optimistic, however, thanks to a combination of the ongoing rise in stock prices, continued economic growth and better-than-forecast fourth-quarter earnings. Seasonality is also contributing to individual investors’ optimistic moods. A failure by Congress to resolve the fiscal issues or further weakness in the economic data could worsen individual investors’ attitudes going forward, however.

This week’s special question asked AAII members how January’s strong start impacted their expectations for how the market will perform over the next six months. There was no clear consensus among the responses. About 19% of respondents expected stock prices to fall over the next few months, but another 5% anticipate a pullback followed by bounce back. Nearly 10% think stock prices will be up for the entire year. Another 10% describe themselves as being more optimistic, while 7% said they were more pessimistic. Approximately 16% said that January’s rise had no impact on their outlook.

The one constant may have been partisan bickering; a lack of progress on growing the economy or threat of the sequestration was cited by 11% of respondents.

Here is a sampling of the responses:

·         “It enhances my expectation for a sell-off in the spring.”

·         “There will be ups and downs, but mostly the market will tread water.”

·         “As January goes, the rest of the year usually follows the same trajectory.”

·         “I feel its front-loading the returns for the year as we have a lot of hurdles to get over the next few months, some of which could derail the economy.”

·         “I expect a pullback in the next few months because of Europe, fiscal cliff number 2 and the debt ceiling. In six months, we will be back to flat”

This week’s AAII Sentiment Survey:

·         Bullish: 42.3%, down 0.5 percentage points

·         Neutral: 29.0%, up 1.3 percentage points

·         Bearish: 28.7%, down 0.8 percentage points

Historical averages:

·         Bullish: 39.0%

·         Neutral: 30.5%

·         Bearish: 30.5%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online at: http://www.aaii.com/sentimentsurvey.

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The American Association of Individual Investors (AAII) is a nonprofit education group that provides the tools, resources and know-how investors need to successfully build and manage investment wealth. AAII members receive our monthly Journal, three model portfolios, access to over 50 local chapters and the comprehensive investment education available on our website at: www.aaii.com.

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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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