AAII Sentiment Survey: Investors Suddenly Deflate

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 3.5 percentage points to 27.6%. This is the lowest level of optimism recorded in the survey since September 22, 2011. This is also the fourth consecutive week that bullish sentiment has been below its historical average of 39%.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, was unchanged at 35.0%. This is the fourth time in five weeks that neutral sentiment has been above its historical average of 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 3.6 percentage points to 37.4%. This is the third consecutive week that bearish sentiment has been above its historical average of 30%.

The difference between bullish and bearish sentiment, the bull-bear spread, worsened to -9.8 percentage points. This is the first time the spread has been negative for three consecutive weeks since October 6, 2011.

There does not seem to be one single factor that is dampening individual investor optimism. Rather, it is the combination of more volatile market conditions, concerns about the pace of economic growth, high gasoline prices, the ongoing European sovereign debt crisis and uncertainty about China’s economy that has caused more investors to be more pessimistic than optimistic about the short-term direction of stock prices.

This week’s special question asked AAII members if they viewed the recent rise in Spanish bond yields as a continuance of the negative headlines out of Europe or if the higher yields have caused them to be more fearful than they were a few months ago. Approximately half of the respondents said the event has not changed their sentiment, but rather they viewed it as a continuation of the ongoing sovereign debt problems. A notable number of respondents, however, said they are more fearful than they were a few months ago.

Here is a sampling of the responses:

“It seems to be a continuation of the negative headlines that will probably go on for years.”
“I have never stopped being fearful about Europe.”
“Europe will go up and down during the next two years. The European Central Bank and the IMF will keep any bad situation from spreading.”
“Not more fearful; I just don’t see any real improvement.”
“I am more fearful because the Spanish economy is so much larger than the Greek economy. This contagion in Europe is not over yet.”

This week’s AAII Sentiment Survey results:

Bullish: 27.6%, down 3.5 percentage points
Neutral: 35.0%, unchanged
Bearish: 37.4%, up 3.6 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