BULLISH SENTIMENT SURGES

Bullish sentiment jumped to its highest level since January 13, 2011, in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, reached 51.6%. The 7.8-percentage-point increase drove optimism to an unusually high level, but not an extraordinarily high level. Bullish sentiment is now above its historical average of 39% for eight out of the past nine weeks.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, declined 2.9 percentage points to 28.2%. This is just the second time in six weeks that neutral sentiment has been below its historical average of 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 4.9 percentage points to 20.2%. This the seventh time in the past eight weeks that bearish sentiment has been below its historical average of 30%.

Bullish sentiment is now more than one standard deviation above its historical average, placing it above the typical range that has been registered over the course of the survey. The difference between bullish and bearish sentiment (the bull-bear spread) is also unusually high at 31.5%, but not so high as to create caution that individual investors are too optimistic.

Driving the bullish sentiment is the belief that both the economy and corporate earnings are improving. Europe’s sovereign debt problems and slow domestic economic growth still concern many individual investors, however.

This week’s special question asked AAII members for their thoughts on Facebook’s initial public offering (IPO) and whether they will consider buying shares of the stock. The overwhelming majority of respondents said they wouldn’t invest in Facebook, especially during or right after the IPO. Many think there is already too much excitement for the offering. Others were worried that the company is a fad or said that they didn’t fully understand the industry.

Here is a sampling of the responses:

• “I will pass. When so many people are excited, the best thing to do is turn away.”
• “Many are buying shares on the basis of pure speculation. At a P/E of 150, the prudent investor would wait.”
• “The IPO will be in great demand, so I would expect the initial trading to be characterized by irrational exuberance.”
• “I wouldn’t touch that IPO with a ten-foot pole.”
• “I will buy it. It’s Google (GOOG) all over, with no one knowing how they’ll make money yet the company will continue to grow.”

This week’s AAII Sentiment Survey results:

• Bullish: 51.6%, up 7.8 percentage points
• Neutral: 28.2%, down 2.9 percentage points
• Bearish: 20.2%, down 4.9 percentage points

Historical averages:

• Bullish: 39%
• Neutral: 31%
• Bearish: 30%