AAII Sentiment Survey: Optimism Returns, But Investors Still Gloomy

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 4.6 percentage points to 29.0%. Despite the improvement, this is the ninth consecutive week that bullish sentiment is below its historical average of 39%.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, edged up 0.3 percentage points to 28.3%. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 4.9 percentage points to 42.8%. Even with the decrease, pessimism remains unusually high. (It is more than one standard deviation above its mean). This is the 16th time in 17 weeks that bearish sentiment has been above its historical average of 30%.

Though there was an improvement in sentiment, individual investors continue to have a gloomy short-term outlook for stocks. The ongoing correction is adversely affecting their moods at a time when many are upset with Washington and concerned about the slowing pace of economic growth.

As noted above, bearish sentiment is above its historical average for the 16th time in 17 weeks. This streak is approaching the one we saw last year, when bearish sentiment never dipped below 30% over a period of 18 consecutive weeks (from May 13 to September 9, 2010).

This week’s special question asked AAII members if they are investing more aggressively or investing more conservatively. Not surprisingly, the overwhelming majority said they are investing more conservatively. (When we asked the same question last January, about half of the respondents said they were taking on less risk.) Some members, however, felt that the recent volatility presents a buying opportunity, either now or in the near future.

Here is a sampling of the responses:

  • “Less risk. I raised my cash position to nearly 50% and am only keeping higher-yielding dividend stocks and fixed income.”
  • “Less risk. The government and the economy are rudderless ships crossing in the night.”
  • “Less risk. I feel very unsure of the economy and the continuing uncertainty caused by the current political policies.”
  • “I’m investing more aggressively because stocks are becoming inexpensive during this market decline.”
  • “If I were 20 – 30 years younger, I would view this time as a potential opportunity to be more aggressive.”
  • “Neither. I have always been a moderate investor and just rebalanced in April. I will ride this slow patch out and rebalance again in October.”

This week’s AAII Sentiment Survey results

  • Bullish: 29.0%, up 4.6 percentage points
  • Neutral: 28.3%, up 0.3 percentage points
  • Bearish: 42.8%, down 4.9 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