Bullish Sentiment Surges by Most Since 2010

By Charles Rotblut, CFA, AAII

Bullish sentiment posted its largest weekly gain in nearly three years, as neutral sentiment plunged according to the latest AAII Sentiment survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, surged 14.4 percentage points to 45.4%. The spike in optimism was the largest since an 18.4-point weekly gain on July 15, 2010. This week’s jump puts optimism at a six-week high. The historical average is 39%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, plunged 7.9 percentage points to 22.5%. Neutral sentiment is now at its lowest level since November 15, 2012. The historical average is 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 6.5 percentage points to 32.0%. Even with the decline, pessimism is above its historical average of 30.5% for the fourth consecutive week.

Though this week’s spike in bullish sentiment is large, it primarily represents a reversion to the mean. Two weeks ago, just 28.4% of surveyed AAII members described themselves as optimistic, the lowest level since November 2010. Furthermore, while large spikes in bullish sentiment are unusual, they are not extraordinary. Over the past five years, bullish sentiment has jumped by double-digits 17 times.

The current level of bullish sentiment is not excessive, but it does in part reflect the Dow Jones industrial average’s nine-day winning streak. While the streak has prompted some investors to be more optimistic about the short-term direction of stock prices, many AAII members remain leery that stocks are overbought and due for a correction. Also impacting sentiment are mixed views about the pace of economic growth and ongoing frustration with Washington.

This week’s special question asked AAII members how the new record highs set by the Dow Jones industrial average has influenced their opinion about the attractiveness of stocks. Responses were mixed. The largest group of respondents (approximately 30%) said the new record highs had no impact. Approximately 18% of respondents expect stock prices to pull back in the short term, though some AAII members think the pullback will be followed by a rebound to even higher prices. Roughly 17% said they are now more cautious or bearish, while 11% said they are more bullish. A couple of respondents said it is harder to find bargains in the current environment.

Here is a sampling of the responses:

·         “The new highs concern me a little, as we may be getting ahead of ourselves.”

·         “I am reluctant to put new money (except for my regular contributions) into the market right now.”

·         “As stocks go up in price, they are more risky in my view, but I think stocks still have more upside than downside at current levels.”

·         “I have to search harder to find stocks of value.”

·         “The record high has not influenced my opinion.”

This week’s AAII Sentiment Survey:

·         Bullish: 45.4%, up 14.4 percentage points

·         Neutral: 22.5%, down 7.9 percentage points

·         Bearish: 32.0%, down 6.5 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.

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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