AAII Sentiment Survey: Optimism Slips Slightly, Pessimism Rebounds

Bullish sentiment slipped slightly, but remained well above its historical average in the latest AAII Sentiment Survey. Optimism that stock prices will rise over the next six months fell 3.0 percentage points to 48.2%. This was the ninth 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, fell 5.2 percentage points to 22.0%. Neutral sentiment has not been this low since July 8, 2010. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, jumped 8.2 percentage points to 29.8%. Though pessimism is at a five-week high, it is merely about even with its historical average of 30%.

The survey results reflect some response to the election and the Federal Open Market Committee (FOMC) statement, but not enough to draw conclusions from it. The reason is that the survey period runs from Thursday 12:01 a.m. through Wednesday 11:59 p.m. Thus, numbers show a mixture of responses from both before and after Tuesday’s elections and yesterday’s Fed meeting statement.

As far as the numbers themselves, bullish sentiment continues to stay above its historical average, but not so much that it implies excessive optimism. The rebound in pessimism was a reversion to the mean for bearish sentiment, which signals that worries about the economy have not faded.

This week’s sentiment survey asked AAII members how, if at all, the problems with home foreclosures have affected their outlook for stocks. The responses were evenly split between those who said the foreclosure problems made them more pessimistic and those who said their sentiment was not impacted by it.

However, there were nuances that should be noted. Among respondents who said foreclosures were having an effect on their outlook, many described the issue as one that impacted homebuilders, banks and the overall economy. On the other hand, there were respondents who said their outlook was unchanged because they did not own homebuilding or banking stocks.

Here is a sampling of the responses:

· “It pushes banks down, which pushes the overall market down.”
· “My outlook is somewhat reduced, especially the Financial and Banking stocks.”
· “It has made me more cautious about equity returns, and prompted me to pay closer attention to my target allocations.”
· “Home foreclosures have been priced into the market already. Therefore, no significant impact going forward.”
· “I don’t invest in stocks associated with housing, be it suppliers, builders or financers. My outlook has not been affected.”

This week’s Sentiment Survey results:

· Bullish: 48.2%, down 3.0 percentage points
· Neutral: 22.0%, down 5.2 percentage points
· Bearish: 29.8%, up 8.2 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