By Charles Rotblut, CFA, AAII

Bullish sentiment rebounded 5.7 percentage points to 37.9% in the latest AAII Sentiment Survey. Optimism that stock prices will rise over the next six months remained below its historical average of 39% for the second consecutive week.

Neutral sentiment, expectations that stock prices will remain essentially flat over the next six months, fell 5.4 percentage points to 31.5%. The decline brought neutral sentiment back close to its historical average of 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, declined 0.3 percentage points to 30.6%. Even with the small drop, bearish sentiment has been essentially unchanged during four out of the last five weeks. The historical average is 30%.

Individual investors continue to be cautiously optimistic. Better-than-forecast earnings and rising stock prices are keeping many optimistic, while inflationary pressures and the uneven pace of the economic recovery remain a concern.

This week’s special question asked AAII members whether they thought the stock market is fairly valued, undervalued or overvalued. The majority of the respondents were split between describing stocks as being fairly valued and overvalued. A notable minority thought stocks were undervalued.

Here is a sampling of the responses:

• “The market is fairly valued and is morphing into becoming overvalued.”
• “I believe the market is fairly valued, but, at this rate, not for long. Stocks could become overvalued in a couple of months.”
• “Probably fairly valued. However, world events have created so much volatility that the market remains very risky.”
• “I believe the market is overvalued because earnings are based on record profit margins, which will return to normal or get worse if inflation picks up.”
• “If inflation rises, then the market is overvalued and will decline.”
• “Undervalued. Stocks are climbing the wall of worry.”

This week’s sentiment survey results:

• Bullish: 37.9%, up 5.7 percentage points
• Neutral: 31.5%, down 5.4 percentage points
• Bearish: 30.6%, down 0.3 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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