BULLISHNESS AT HIGHEST LEVELS SINCE 2007
Sentiment levels have remained exceedingly high for several months now as investors begin to feel more confident in the economic recovery and believe that equity prices have but one direction to move. The latest reading from the Investor’s Intelligence survey showed another climb in bullish sentiment to 56.8%. This is the highest reading since the Fall of 2007 when equity markets were at their all-time highs.
The AAII survey is showing similar bullishness at 50.2%. This is down slightly from last week, but still well above the historical average of 39%. Charles Rotblut of AAII elaborated on the data:
“Bullish sentiment, expectations that stocks prices will rise over the next six months, stayed above its historical average for the 15th consecutive week in the latest AAII Sentiment Survey. Optimism registered 50.2%, a 2.8 percentage-point dip from the previous week.
Neutral sentiment, expectations that stock prices will remain essentially unchanged over the next six months, declined 1.8 percentage points to 22.6%. This was the 19th consecutive week that neutral sentiment has been below its historical average of 31%.
Bearish sentiment, expectations that stock prices will fall over the next six months, rose 4.6 percentage points to 27.1%. Though this is a four-week high for pessimism, bearish sentiment remains within the range we have seen since beginning of October. The historical average is 30%.
By several measures, bullish sentiment is running hot. These measures include the current reading, the number of weeks above its historical average and the eight-week moving average. However, optimism was hotter in 2004, the last time we saw a long streak of above average bullish sentiment. Thus, while bullish sentiment is hot enough to take notice, there have been past periods when it has run even hotter.”
While these surveys tend to be better indicators of near-term sentiment we are also seeing extremely high levels of bullishness in the long-term outlooks. According to Bespoke Investments there isn’t a single analyst from one of the major banks who believes equity prices will decline next year. The average expected return is 10%:
So, is the wall of worry gone?
I use the NAAIM survey vs the II since it is free.
The NAAIM survey started in July of 2006 so we have four and a half years of data or 233 weekly surveys. In these 233 surveys there are only five times – including this week – where the NAAIM survey was above the current level and the AAII survey bullish sentiment was above 50%.
Date AAII NAAIM S&P500 CAPE +1 yr +2 yr
return return
19-Oct-06 54% 84% 1,367.0 24.5 10% -31%
26-Oct-06 52% 80% 1,389.1 24.9 11% -35%
18-Jan-07 58% 85% 1,426.4 25.2 -7% -41%
4-Oct-07 52% 75% 1,542.8 26.1 -29% -33%
16-Dec-10 50% 75% 1,242.9 22.7 ??? ???
As can be seen when both sentiment surveys hit these levels in 2006, the market was able to rally for another year culminating with the all-time, nominal S&P 500 high in October of 2007. The two 2007 occurrences both resulted in one year declines. Over two years, all four occurrences resulted in a decline in the S&P 500 of over 30%! This is admittedly a small sample size and the market is currently not valued as richly as the other occurrences – as evidenced by the CAPE in table above – but it is a warning nonetheless worth considering.
Sorry, columns got messed up. They are:
date, AAII % bullish, NAAIM % long equity, S&P500 level, CAPE, 1 yr return and 2yr return.
Bottom line. In the past four instances where bullish sentiment in both surveys is at current levels; 1 yr returns are mixed with 2yr returns down 30%.
Interesting. Thanks SD.
No problem. A much better table of the data is up at my site for those who care to check it out.
It would be interesting to compare the II and AAII surveys to get a more robust sample size. It would be interesting to see the # of occurrences when both we above their long-term standard deviations and the subsequent returns. You provide the data and I would run the analysis.
On the other hand, the average consensus is pretty good, whether we like the individuals or not.
“Optimism registered 50.2%, a 2.8 percentage-point dip from the previous week.”
“Neutral sentiment, expectations that stock prices will remain essentially unchanged over the next six months, declined 1.8 percentage points”
“Bearish sentiment, expectations that stock prices will fall over the next six months, rose 4.6 percentage points”
“By several measures, bullish sentiment is running hot. These measures include the current reading, the number of weeks above its historical average and the eight-week moving average. ”
By these measures, it seems to me that the current bullish sentiment is running cold. And 8-week moving average means little to the bi-polar nature of the Mr. Market (see double-dip deflation of late August to the do-no-wrong inflation of today). Lastly, while the Intelligent Investor Survey has been around for quite awhile, I would still have to question the usefullness of today’s readings,or the 8wk avg,relative to historical measures.
Lastly, while sentiment has been the most bullish since 2007, I would hope so. The problems today were present, yet ignored, then, so with our focus and “progress” on such problems since then, I would expect a more bullish stance. In 2007, reality was unexpected, but today, it is known. Being surprised is unsettling, but that doesn’t mean that bullishness prior relates, in any way, to the bullishness, today. In fact, bullishness levels in 2007 can be argued to have been elevated, while todays may better reflect reality (at the time of the reading).
Not saying that I am optimistic…
it should be interesting comparing this data with 94-95 and 04-05…. past 3 yrs doesnt say much
I am also looking at the following indicators:
- AAII survey: overbullish
- VIX: reaching complacency levels now
- Put/Call ratio: still not quite extreme