AAII Sentiment Survey: Bullish Sentiment At New High for 2010

Bullish sentiment reached a new 2010 high in the latest AAII Sentiment Survey. Optimism that stock prices will rise over the next six months jumped 9.3 percentage points to 57.6%. This is the highest bullish sentiment has been since January 18, 2007. The historical average is 39%.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next months, plunged 8.0 percentage points to 14.0%. This is a nearly an 18-month low for neutral sentiment. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, slipped 1.3 percentage points to 28.5%. This is the sixth consecutive week that bearish sentiment has been below its historical average of 30%.

Bullish sentiment is at an unusually high level and it shows that the market’s reaction to last week’s events has raised individual investors’ hopes. Since there have been correlations between high bullish and bearish readings and market reversals, I looked at what happened to the S&P 500 over four-week period following each survey period in which optimism exceeded current levels. On average, the index was 1% lower. (There have been slightly more than 60 weeks when higher readings for bullish have been recorded. I can provide the historical data upon request.)

The results did not show a clear pattern. A big reason why is that there have been several periods where bullish sentiment has stayed at extraordinarily high levels, such as November 2003 through January 2004. Thus, there is room for interpretation on what happens to the market after a high reading is recorded on our survey.

I should point out that bearish sentiment in our survey has mostly been hovering just below its historical average over the past few weeks. This shows that worries about the economy, interest rates and future inflation remain front and center for many individual investors.

This week’s special question asked AAII members if there were any economic or market-related catalysts they are looking for over the next few months. Responses varied, though the Federal Reserve’s quantitative easing (QE2) program and job growth were cited by the largest number of respondents. Many AAII members also listed the expiring Bush tax cuts and potential future inflation as issues they are paying close attention to.

Here is a sampling of the responses:

“QE2 scares the heck out me.”
“The potential for rising prices and inflation.”
“Fed stimuli (now plural) will find traction.”
“I would like to see an increase in employment and personal disposable income, which would indicate a growing economy. I expect modest improvement at best.
“Improvement in the unemployment numbers would be one indicator business is feeling more bullish.”
“I’m looking for improved consumer spending on the retail sector over the holiday period.”

This week’s Sentiment Survey results:

Bullish: 57.6%, up 9.3 percentage points
Neutral: 14.0%, down 8.0 percentage points
Bearish: 28.5%, down 1.3 percentage points

Historical 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