AAII Sentiment Survey: Bullish Sentiment at a Six-Year High

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 13.1 percentage points to 63.3% in the latest AAII Sentiment Survey. This is the highest level of optimism since November 18, 2004. This is also the 16th consecutive week that bullish sentiment has been above its historical average of 31%, the longest such streak since 2004.

Neutral sentiment, expectations that stock prices will remain essentially flat, declined 2.3 percentage points to 20.3%. This is a six-week low for neutral sentiment and the 20th 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, fell 10.7 percentage points to 16.4%. This is the lowest level of pessimism since July 14, 2005. It is also the 11th time in the past 12 weeks that bearish sentiment has been below its historical average 30%.

The spread between bullish and bearish sentiment is currently at +46.9 points. This is the most positive bull-bear spread since April 15, 2004, when it reached +50.0 points. A wider differential was recorded on March 5, 2009, when the bull-bear spread fell to -51.4 points.

Bullish sentiment is more than two standard deviations from its historical mean, making it a statistical outlier. In simpler terms, bullish sentiment is running red hot. In fact, the current reading is the 18th highest since the survey started in 1987. Higher readings were recorded in 1987, 2000, 2001, 2003 and 2004. Such high levels of optimism have been correlated with a decline in the S&P 500 over the proceeding 24 weeks, though the magnitude of the declines have varied. A spreadsheet showing all of the survey’s historical data is attached.

Investors are advised to consider a variety of factors before making a forecast about the direction of stock prices, rather than rely on one sole indicator or survey.

On a lighter note, this week’s special question asked AAII members what their favorite Christmas movie or television special was. “It’s a Wonderful Life” was the top choice, followed by a “A Christmas Story.” “Earnest Saves Christmas” did receive one vote, however. My favorites are “A Charlie Brown Christmas” followed closely by “How the Grinch Stole Christmas” (the 1996 version, of course).

This week’s sentiment survey results:

Bullish: 63.3%, up 13.1 percentage points
Neutral: 20.3%, down 2.3 percentage points
Bearish: 16.4%, down 10.7 percentage points

Historical Sentiment Averages:

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

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

More from The Cheat Sheet