AAII Sentiment Survey: Bullish Sentiment Remains at Historically High Levels

Bullish sentiment extended its streak of above-average readings to 18 consecutive weeks in the latest AAII Sentiment Survey. This is the longest such streak since 2004. The percentage of individual investors expecting stock prices to rise over the next six months rose 4.3 percentage points to 55.9%. The historical average is 39%.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, fell 2.5 percentage points to 25.9%. Neutral sentiment has been below its historical average of 31% for 22 consecutive weeks.

Bearish sentiment, expectations that stocks prices will fall over the next six months, slipped 1.8 percentage points to 18.3%. Bearish sentiment has been below its historical average of 30% for 15 out of the last 17 weeks.

Bullish sentiment remains at historically high levels. One example of this is the eight-week moving average of bullish sentiment, which is above 51% for the third consecutive week. (It is at 51.4%.) This measure has not higher since January 2005. Other measures also suggest sentiment is running hot, including the spread between bullish and bearish sentiment (37.6 percentage points) and the standard deviation (bullish sentiment is more than one standard deviation above the historical mean). High bullish readings have been correlated with market pullbacks, but other indicators should be analyzed before predicting where stocks prices are headed.

Individual investors are continuing to feel optimistic about stock prices due to, in part, the sustained rally and additional signs that the economy is recovering. News of upbeat 2011 forecasts from several market strategists is also playing a role.

This week’s special question asked AAII members whether they are concerned about the potential impact rising gasoline prices will have the economic recovery. About half of respondents described themselves as being somewhat worried about rising prices at the pump. Many did think the economy will grow, though the pace of the recovery might be slowed. Several members added the caveat that their concerns are dependent on how high prices actually rise. A small number thought higher prices would be good for their energy holdings or would increase demand for fuel-efficient vehicles and other green initiatives.

Here is a sampling of the responses:

  • “I believe gasoline must approach $4 per gallon before having a sizable impact on other parts of the economy.”
  • “Higher inflation equals a real tax on investors. It could be a drag on the economy, but the economy will still grow.”
  • “I’m worried, but I think the recovery can still proceed, especially if Congress provides some direction for job growth.”
  • “I’m not too worried. Higher gas prices will be a slight drag, but not sufficient to significantly slow down the economy.”
  • I’m somewhat worried; higher fuel prices may slow the economy some, but they may also help the environment.”

This week’s sentiment survey results:

  • Bullish: 55.9%, up 4.3 percentage points
  • Neutral: 25.9%, down 2.5 percentage points
  • Bearish: 18.3%, down 1.8 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