AAII: BULLISH SENTIMENT DIPS BELOW HISTORICAL AVERAGE

By Charles Rotblut, CFA, AAII

Bullish sentiment, expectations that stock prices will rise over the next six months, plunged 9.9 percentage points to 36.6% in the latest AAII Sentiment Survey. This is the first time in 25 weeks that optimism has been below its historical average of 39%.

Neutral sentiment, expectations that stock prices will remain essentially flat over the next six months, edged down 0.6 percentage points to 27.2%. This is the 29th consecutive week that neutral sentiment has remained below its historical average of 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, surged 10.7 percentage points to 36.2%. Pessimism is at its highest level since September 2, 2010. This is just the fourth time in the past 24 weeks that bearish sentiment has been above its historical average of 30%.

The ongoing instability in the Middle East is intensifying concern about higher rates of inflation. Individual investors are already seeing higher gas prices at the pump, and there is worry that even higher prices could slow down the pace of the economic recovery. Though AAII members had been optimistic about the direction of stock prices, there was underlying unease about jobs, the federal deficit and the potential for rising interest rates and inflation. Thus, though individual investors were hopeful, they were not exuberant.

This week’s special question asked AAII members what economic or market-related catalysts they are looking for over the next few months. Responses varied, though the possibility of higher inflation was cited by the largest number of respondents. Many individual investors said they were monitoring events in the Middle East, expecting higher interest rates and watching to see if Washington will make any meaningful progress on the deficit and avoiding a shutdown.

Here is a sample of the responses.

• “Inflation. I believe there is growing pressure for producers to start passing on some of the rise in commodity costs soon, or their profitability will begin to suffer.”
• “North Africa is like a smoldering tinderbox, and that is sure to have ramifications on the U.S. markets.”
• “I am watching Washington. Will it engage in problem solving or political behavior with respect to its fiscal agenda?”
• “I am looking at the all the capital that corporate America is sitting on. If I see them start to utilize the capital, I will be long on large-cap stocks.”
• “Employed people spending money drive our economy. Steadily increasing employment is key to our continued recovery.”

This week’s sentiment survey results:

• Bullish: 36.6%, down 9.9 percentage points
• Neutral: 27.2%, down 0.6 percentage points
• Bearish: 36.2%, up 10.7 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