AAII Sentiment Survey: Bullish Sentiment Rises; Stays Above Average for 14th Week

Bullish sentiment reached a four-week high in the latest AAII Sentiment Survey. Expectations that stock prices will rise over the next six months rose 3.4 percentage points to 53.0%. This is the 14th consecutive week that bullish sentiment has been above its historical average of 39%.

Neutral sentiment, expectations that stock prices will remain essentially flat over the next six months, edged up 0.3 percentage points to 24.4%. This is the 18th 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, dropped 3.6 percentage points to 22.6%. This is a six-week low for bearish sentiment. The historical average is 30%.

As stated above, bullish sentiment is above its historical average for the 14th consecutive week. The last time we saw a longer streak was in 2004, when bullish sentiment stayed above its historical average for 19 consecutive weeks. Optimism is currently more than one standard deviation beyond its historical average, meaning that this is an unusually high reading. This is also the second time in five weeks that optimism has been more than one standard deviation above its historical average. (Bullish sentiment reached 57.6% on November 11, 2010.)

The more notable statistic this week may be the spread between bullish and bearish sentiment, which stands at +30.5 percentage points. Fewer than 15% of all bull-bear spreads throughout the survey’s history have been wider.

The last time we saw a wider spread was on July 8, 2010, when the spread was -36.1 percentage points (bullish sentiment was 20.9% and bearish sentiment was 57.1%.) This occurred just as the market was setting a bottom during the summer months. The last time we saw bigger positive spread (bullish sentiment exceeding bearish sentiment) was on February 22, 2007 when bullish sentiment was 53.9% and bearish sentiment was 22.3%. There was a short-term pullback in the weeks that followed this reading, but the market was higher in the months that followed.

This week’s special question asked members for the primary reasons why they are bullish, neutral or bearish. Though the responses were diverse, the most commonly cited positive influences were an anticipated resolution on 2011 taxes, an improving employment outlook, and higher corporate profits. European sovereign debt, the still weak labor market, the U.S. federal deficit and potential legislative gridlock were the most commonly cited negative factors.

Here is a sampling of the responses:

“Taxes are not going up!”
“There is a certain ‘feel’ in the market that makes me believe the recovery is real. Jobs will soon start showing a huge upswing.”
“Earnings and improved retail sales are influencing my sentiment.”
“The gridlock in Congress and the size of the deficit in relation to GDP could prevent the economy from rebounding strongly.”
“I’m neutral because I don’t know if the latest Federal Reserve quantitative easing program is enough to stop an EU sovereign meltdown and/or a Chinese contraction based on tightening.”

This week’s sentiment survey results:

Bullish: 53.0%, up 3.4 percentage points
Neutral: 24.4%, up 0.3 percentage points
Bearish: 22.6%, 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