AAII Sentiment Survey: Bullish Sentiment Falls to a 10-Week Low

Bullish sentiment fell to a 10-week low in the latest AAII Sentiment Survey. Expectations that stock prices will rise over the next six months fell 8.7 percentage points to 42.0%. Despite the decrease, bullish sentiment remains above its historical average for the 21st consecutive week. This is the second longest streak for above-average bullish sentiment since the survey began in 1987.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, rose 3.5 percentage points to 23.7%. Nonetheless, neutral sentiment remains below its historical average of 31% for the 25th consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 5.2 percentage points to 34.3%. This is the highest level of pessimism since September 2, 2010. It is also only the fourth week since then that bearish sentiment has been above its historical average of 30%.

Bearish sentiment has nearly doubled over the past four weeks, from 18.3% on January 6 to 34.3% now. Though this does somewhat reflect a reversion to the mean, it also shows that some investors are becoming less enthusiastic about the short-term direction of the stock market. The length of the rally, the 1% decline in the S&P 500 last Wednesday (January 19), and the level of optimism signaled by the various sentiment surveys–including ours—are all contributing factors.

It is important to note, however, that bullish sentiment continues to stay above its historical average. The current 21-week streak of above-average bullish sentiment is the second longest such streak in the survey’s history.

This week’s special question asked AAII Members if they were taking on more risk as of late or if they were investing more conservatively (meaning taking on less risk). About half of the respondents said they are taking on less risk. A third said they are taking on more risk. The rest said they were not making any real changes.

Here is a sampling of the responses:

  • “I’m investing a little more conservatively, since we’ve had a big run up in the last six months.”
  • “Conservatively. Sentiment indicators are extremely bullish, and you know that’s a contrarian indicator.”
  • “I am investing more of my cash reserves, but with stocks and funds I consider to be of moderate risk.”
  • “I have been taking on more risks with my individual stock picks. The run up since March 2009 has perhaps emboldened me.”
  • “More risk. The economy still improving, although slowly. President Obama will likely focus more on the economy.”

This week’s AAII Sentiment Survey results

  • Bullish: 42.0%; down 8.7 percentage points
  • Neutral: 23.7%; up 3.5 percentage points
  • Bearish: 34.3%; up 5.2 percentage points

Historical Averages

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

Charles Rotblut is the author of the new book Better Good than Lucky: How Savvy Investors Create Fortune with the Risk-Reward Ratio. 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

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