AAII Sentiment Survey: Bullish Sentiment Near 2-1/2 Year High

Optimism among individual investors reached its highest level in nearly two and one-half years, according to the latest AAII Sentiment Survey. Bullish sentiment, expectations that stock prices will rise over the next six months, rose 1.6 percentage points to 51.2%. The historical average is 39%.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, rose 2.0 percentage points to 27.2%. This is the highest neutral sentiment has been in five weeks. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 3.6 percentage points to 21.6%. This is the lowest level of pessimism since January 12, 2006. The historical average is 30%.

With bullish sentiment at its highest level since May 8, 2008 and bearish sentiment at its lowest level since January 12, 2006, the question becomes whether either reading is excessive. The answer is no. Bullish sentiment is just slightly above one standard deviation from the historical average and bearish sentiment is within one standard deviation. In other words, if we were to plot all of the readings since the survey began in 1987, neither this week’s bullish nor bearish sentiment reading would stand out as an outlier.

As for the reason why bullish sentiment continues to improve, investors are becoming more confident that a bottom in the market has been established. Nonetheless, many individual investors continue to have concerns about the economy, interest rates and the federal deficit.

This week’s special question asked AAII members what sectors and industries they like right now. Technology was named by the largest number of respondents, followed by commodities, gold, energy, finance and banks, and health care. When we asked the same question last August, the most popular sectors and industries were technology, commodities, and energy.

This week’s sentiment survey results:

Bullish: 51.2%, up 1.6 percentage points
Neutral: 27.2%, up 2.0 percentage points
Bearish: 21.6%, down 3.6 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