AAII Sentiment Survey: Investors are More Optimistic Than Normal

Bullish sentiment rebounded to its first above-average reading since mid-November in the latest AAII Sentiment Survey. Bearish sentiment fell, but it continues to stay above its historical average.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 1.6 percentage points to 40.2%. This is the third consecutive weekly increase in optimism. It is also the first time since November 17, 2011 that bullish sentiment has been above its historical average of 39%.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, declined 0.5 percentage points to 26.2%. This was the third consecutive weekly decrease. It is also the 21st time in the past 22 weeks that neutral sentiment has been below its historical average of 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 1.1 percentage points to 33.6%, a four-week low. Even with the decrease, bearish sentiment stayed above its historical average of 30% for the 5th consecutive week and the 37th out of the past 43 weeks.

Though there has been an improvement in bullish sentiment over the past few weeks, many investors remain cautious, and frustrated. Ongoing market volatility, slow economic growth, European sovereign debt problems and Washington politics are all continuing to fray nerves. Whether the current rise in bullish sentiment signals a turning point remains to be seen, particularly since optimism has not stayed above its historical average for a period of longer than four weeks since last February.

This week’s special question asked AAII members what impact, if any, a possible extension of the payroll tax cut into 2012 would have on their six-month outlook for stocks. The majority of respondents said an extension would have no impact or just a small, though positive, impact. There were many members, however, who thought an extension would help stock prices.

Here is a sampling of the responses:

  • “The payroll tax cut will have no impact on stocks.”
  • “None really, except that I think an extension would be helpful for consumer behavior.”
  • “If the tax cut is not extended, then I expect the market to decline, on expectations of lower earnings going forward.”
  • “An extension would be a slight positive for the market, with people having more money in their pockets to spend or pay down debt.”
  • “An extension would help the economy by increasing purchasing power. An improved economy should increase the value of stocks.”

This week’s AAII Sentiment Survey results:

  • Bullish: 40.2%; up 1.6 percentage points
  • Neutral: 26.2%; down 0.5 percentage points
  • Bearish: 33.6%; down 1.1 percentage points

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