Bullish Sentiment Below 50% for Third Time in 4 Weeks – AAII Sentiment Survey

Bullish sentiment declined 2.8 percentage points to 46.6% in the latest AAII Sentiment Survey. This is the third time in four weeks that optimism has been below 50%. Nonetheless, bullish sentiment, expectations that stock prices will rise over the next six months, was above its historical average of 39% for the 24th consecutive week. This is the second longest such streak in the survey’s history.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, rose 4.2 percentage points to 27.9%. This is a seven-week high for neutral sentiment. Nonetheless, neutral sentiment remained below its historical average of 31% for the 28th consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 1.3 percentage points to 25.6%. This was the 20th time in the past 23 weeks that pessimism has been below its historical average of 30%.

As stated above, bullish sentiment has come in below 50% during three out of the last four weeks. Though still high, optimism has cooled a bit from the red hot levels recorded throughout much of December and January. The continuation of the rally’s current leg, better-than-expected earnings and calm market conditions are combining to keep individual investors hopeful about the direction of stock prices.

This week’s special question asked AAII members about the current lack of volatility. (There have only been four days since December 3 when the S&P 500 has posted a daily gain or loss of greater than 1%.) Opinions varied, but many members thought the markets are currently experiencing a false sense of calm. A sizeable minority, however, thought the low level of volatility was justified.

Though the belief that there is a false sense of calm may sound like it contradicts with our weekly sentiment survey has been registering, I think it accurately portrays what many investors are feeling. Earnings and the economy are recovering, but there are still several underlying problems (unemployment, housing, the federal deficit, etc.). Thus, while there is optimism, there is also discomfort.

Here is a sampling of what AAII members said about the current lack of volatility:

* “Although it is very encouraging, I continue to have a low level of anxiety.”
* “It’s not a false sense of calm, but more an illusion of calm. There is still some serious deleveraging going on in the economy.”
* “It’s a false sense of security. Everybody is once again believing in the miracle.”
* “It’s justified…Too many positive developments nationally and internationally with mid-term implications to ignore.”
* “I believe the lack of volatility signifies that many people may believe the good times have arrived again.”

This week’s AAII Sentiment Survey results:

* Bullish: 46.6%; down 2.8 percentage points
* Neutral: 27.9%; up 4.2 percentage points
* Bearish: 25.6%; down 1.3 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.

I am available for comment about this week’s results or any other matters relating to individual investors.

If anyone else in your organization would like to be included on the distribution list for this e-mail, please let me know.

The American Association of Individual Investors (AAII) is a nonprofit education group that provides the tools, resources and know-how investors need to successfully build and manage investment wealth. AAII members receive our monthly Journal, three model portfolios, access to over 50 local chapters and the comprehensive investment education available on our website at: www.aaii.com.

A copy of this press release is available online at: http://www.aaii.com/news/archives/20110217.cfm.

An RSS feed for the AAII Sentiment Survey is also available here.

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