Bullish sentiment jumped to its highest level since January 13, 2011, in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, reached 51.6%. The 7.8-percentage-point increase drove optimism to an unusually high level, but not an extraordinarily high level. Bullish sentiment is now above its historical average of 39% for eight out of the past nine weeks.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, declined 2.9 percentage points to 28.2%. This is just the second time in six 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, fell 4.9 percentage points to 20.2%. This the seventh time in the past eight weeks that bearish sentiment has been below its historical average of 30%.

Bullish sentiment is now more than one standard deviation above its historical average, placing it above the typical range that has been registered over the course of the survey. The difference between bullish and bearish sentiment (the bull-bear spread) is also unusually high at 31.5%, but not so high as to create caution that individual investors are too optimistic.

Driving the bullish sentiment is the belief that both the economy and corporate earnings are improving. Europe’s sovereign debt problems and slow domestic economic growth still concern many individual investors, however.

This week’s special question asked AAII members for their thoughts on Facebook’s initial public offering (IPO) and whether they will consider buying shares of the stock. The overwhelming majority of respondents said they wouldn’t invest in Facebook, especially during or right after the IPO. Many think there is already too much excitement for the offering.  Others were worried that the company is a fad or said that they didn’t fully understand the industry.

Here is a sampling of the responses:

• “I will pass. When so many people are excited, the best thing to do is turn away.”
• “Many are buying shares on the basis of pure speculation. At a P/E of 150, the prudent investor would wait.”
• “The IPO will be in great demand, so I would expect the initial trading to be characterized by irrational exuberance.”
• “I wouldn’t touch that IPO with a ten-foot pole.”
• “I will buy it. It’s Google (GOOG) all over, with no one knowing how they’ll make money yet the company will continue to grow.”

This week’s AAII Sentiment Survey results:

• Bullish: 51.6%, up 7.8 percentage points
• Neutral: 28.2%, down 2.9 percentage points
• Bearish: 20.2%, down 4.9 percentage points

Historical averages:

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

Investors Intelligence is reporting the highest reading of bullish oriented news writers since May of 2011. Those writing articles with a bullish sentiment now make up 52%, while bearish views are down slightly from prior week at 29%. Many who have been predicting a correction have become bullish, with those in the “corrections camp” now at 19%, the lowest in 4 weeks.

With VIX at July-2011 levels and the CS Risk Appetite Index clearly in the neutral zone, this may be time to become more cautious on the equity markets. While fundamentals remain strong, one needs to watch the technicals more closely.

CS Risk Appetite Index (source: CS)

Notes:

Individual investors boosted their allocations to equities last month according to the January 2012 Asset Allocation Survey.

AAII members allocated 60.9% of their portfolio stocks and stock funds in January, an increase of 4.8 percentage points from December. This is the first time equity allocations were above their historical average of 60% since July 2011.

Bond and bond fund allocations declined 0.8 percentage points to 20.9%, a three-month low. Even with the decrease, January marked the 32nd consecutive month that fixed-income allocations remained above their historical average of 15%.

Cash allocations plunged 4.0 percentage points to 18.2%. This was the smallest allocation to cash since May 2011. The historical average is 25%.

Equity allocations rebounded strongly as AAII members became more upbeat about the short-term direction of stock prices. Improving economic data and growing corporate profits haveled to above-average bullish readings in our weekly Sentiment Survey. This optimism has filtered through to portfolio allocations. Equity allocations are close to their historical average, however, as individual investors continue to cast a wary eye toward the European sovereign debt crisis.

Last month’s special question asked AAII members if they thought they were overweighting or underweighting stocks relative to the allocations suggested for their age. The majority of respondents said they were overweighting stocks. Many cited low bond yields as the primary reason for doing so. Several said they were not reliant on their portfolios for income or were otherwise able to handle the higher volatility from overweighting stocks. Some also viewed stocks as having the most upside potential.
Here is a sampling of the responses:

• “Overweight stocks. Yields are too low on bonds. I feel that stocks offer a better risk-reward tradeoff.”
• “For my age, I’m overweight stocks, but I draw income from my portfolio, so I want a more aggressive investment focus.”
• “I’m overweight stocks because I feel that this is a buying opportunity.”
• “Underweighting due to volatile market conditions and personal preference toward risk aversion and capital preservation.”
• “Underweight, but I am looking for opportunities to deploy cash.”

January Asset Allocation Survey Results:

• · Stocks/Stock Funds: 60.9%, up 4.8 percentage points
• · Bonds/Bond Funds: 20.9%, down 0.8 percentage points
• · Cash: 18.2%, down 4.0 percentage points

January Asset Allocation Survey Details:

• · Stocks: 29.6%, up 4.0 percentage points
• · Stock Funds: 31.3%, up 0.8 percentage points
• · Bonds: 5.0%, down 0.8 percentage points
• · Bond Funds: 16.0%, no change

Historical Averages

• Stocks/Stock Funds: 60%
• Bonds/Bond Funds: 15%
• Cash: 25%

“SANTA ANA, Calif., February 2, 2012––CoreLogic (NYSE: CLGX), a leading provider of information, analytics and business services, today released its December Home Price Index (HPI®) report, the most timely and comprehensive source of home prices available today, giving the first look at full-year 2011 price changes. The CoreLogic HPI shows that, including distressed sales, home prices in the U.S. decreased 4.7 percent in 2011 compared with December 2010. This year-end report shows that home prices continued the trend of year-end decreases—this is the fifth consecutive year with a decrease in the HPI. The HPI excluding distressed sales shows that home prices decreased by 0.9 percent in 2011, giving an indication of the impact of distressed sales on home prices in 2011.

‘While overall prices declined by almost 5 percent in 2011, non-distressed prices showed only a small decrease. Until distressed sales in the market recede, we will see continued downward pressure on prices’ said Mark Fleming, chief economist for CoreLogic.”

• “Still seeing raw materials pricing moving down in general, but expect inflation later in the quarter.” (Chemical Products)
• “Year starting a little slow, but customers are positive about increased business in 2012.” (Machinery)
• “Once again, business continues to be strong.” (Paper Products)
• “Pricing remains in check with the demand we are seeing. Supplier deliveries are on time or early.” (Food, Beverage & Tobacco Products)
• “The economy seems to be slowly improving.” (Fabricated Metal Products)
• “Business lost to offshore is coming back.” (Computer & Electronic Products)
• “Business remains strong. Order intake is great — more than 20 percent above budget.” (Primary Metals)
• “Indications are that 2012 business environment will improve over 2011.” (Transportation Equipment)
• “Market conditions appear to be improving, with the outlook for 2012 better yet.” (Wood Products)

So no recession, but let’s not get overly excited here.  The equity markets appear to be responding to the data with their now standard beginning of the month “the world isn’t ending” party,  but it’s important not to get overly excited by this benign data.  The key to a sustained and strong recovery remains employment and that is still the weak link in just about all the data.

• Economic performance improved in the final quarter of 2011. But the year overall was the slowest non-recessionary year of GDP growth since 1947 – hardly cause for a victory lap.

• Recent data make us more secure in our belief that the expansion will persist unimpeded in 2012. We remain skeptical that a new phase of sustained faster growth is upon us. We still expect 2012 GDP growth at 2.2% on a Q4/Q4 basis (2.3% annual average).

• In our last forecast review, we cited risks around that forecast as being titled to the downside. Risks appear more balanced now, due in no small measure to the ECB’s three-year long-term refinancing operation, which has reduced financial stress and the risk of a systemic panic in global financial markets. Reflecting more positive recent developments, our recession probability model has fallen to virtually zero from a local high of 35% in September 2011.

• The economy shows symptoms of a slowdown in potential GDP growth. The fact that the economy has not managed a single quarter above 3% since the early stage of the recovery is telling in itself. This may reflect structural change as much as cyclical disappointment.

Source: Credit Suisse

“Severely depressed real estate prices continue to be a concern for investors. For some perspective on the magnitude of the decline in home prices, today’s chart presents the median single-family home price divided by the price of one ounce of gold. This results in the home / gold ratio or the cost of the median single-family home in ounces of gold. For example, it currently takes a relatively low 105 ounces of gold to buy the median single-family home. This is dramatically less than the 601 ounces it took back in 2001. When priced in gold, the median single-family home is down over 80% from its 2001 peak, remains well within the confines of a six-year accelerated downtrend and remains very near its 1980 trough.”