AAII Sentiment Survey: Pessimism Rises to a 3-Month High

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Pessimism about the short-term direction of stock prices rose to a three-month high in the latest AAII Sentiment Survey. Optimism continued to fall, while neutral sentiment extended its streak of above-average readings to 29 weeks.

Bullish sentiment, expectations that stock prices will rise over the next six months, declined 2.7 percentage points to 29.6 percent. This is an 11-week low. It is also the 17th time in the past 19 weeks that optimism is below its historical average of 39 percent.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 1.3 percentage points to 40.4 percent. As noted above, the increase puts neutral sentiment above its historical average of 30.5 percent for the 29th consecutive week. This is the third-longest streak of readings over 30.5 percent for neutral sentiment in the survey’s history.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 1.5 percentage points to 29.9 percent. This is the highest level of pessimism recorded by our survey since April 17. Nonetheless, bearish sentiment remains below its historical average of 30.5 percent for the 14th straight week and the 37th out of the last 41 weeks.

Neutral sentiment is back up to unusually high levels (more than one standard deviation above its historical average) for the first time in a month. Historically, unusually high neutral sentiment readings have been followed by better-than-average market performance over the proceeding six- and 12-month periods. The link is not causal, however.

The bull-bear spread (the difference between bullish and bearish sentiment) turned negative for the first time since early May. The shift follows July 17′s 1.2 percent drop in the S&P 500, which was the biggest one-day drop since April. Though stock prices have rebounded since then, the decline came at a time when many individual investors have concerns about valuations. Some AAII members are also fretting about the events in the Middle East and Ukraine, the pace of economic growth, and Washington politics. Other AAII members remain optimistic about sustained economic growth, the market’s upward trend, and the Federal Reserve’s tapering of bond purchases.

This week’s special question asked AAII members what sectors or segments they think are excessively overvalued right now. Responses were mixed. Slightly less than a quarter of all respondents (24 percent) said either no segment is excessively overvalued or that the overall market is fairly valued right now. About 13 percent view social media and Internet companies as being excessively overvalued. Technology was named by 12 percent. Financials and technology were each listed by 9 percent of respondents. (Some respondents named more than one sector or industry group.)

This week’s AAII Sentiment Survey results:

  • Bullish: 29.6 percent, down 2.7 percentage points
  • Neutral: 40.4 percent, up 1.3 percentage points
  • Bearish: 29.9 percent, up 1.5 percentage points

Historical averages:

  • Bullish: 39 percent
  • Neutral: 30.5 percent
  • Bearish: 30.5 percent

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 here.

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