These sentiment surveys are notoriously difficult to utilize in any investment strategy, but there are times when they reach extremes when I think their data is more telling than at most other times. In the case of the recent AAII readings, pessimism is at a 6 month low. Here’s more from Charles Rotblut:
Pessimism among individual investors is now at a six-month low, according to the latest AAII Sentiment Survey. Neutral sentiment remains at an unusually high level, while optimism is slightly below its historical average.
Bullish sentiment, expectations that stock prices will rise over the next six months, rose 2.0 percentage points to 37.2%. The rebound is not big enough to keep optimism from being below its historical average of 39.0% for the 13th time in the past 15 weeks, however.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, edged up 1.0 percentage points to 41.7%. This is the seventh time in nine weeks that neutral sentiment is above 40%. Neutral sentiment is also above its historical average of 30.5% for the 25th consecutive week.
Bearish sentiment, expectations that stock prices will fall over the next six months, fell 3.0 percentage points to 21.1%. This is the lowest level of pessimism registered in our survey since December 26, 2013 (18.5%). The decline keeps bearish sentiment below its historical average of 30.5% for the 10th straight week and the 33rd out of the last 37 weeks.
Despite hitting a six-month low, bearish sentiment remains within its typical range. It is near the bottom of the typical range, however. Historically, unusually low levels of bearish sentiment have been followed by only slightly weaker-than-average market performance (an average 26-week return of 4.0% for the S&P 500 versus 4.4% for all weeks since September 1987).
Neutral sentiment is above its typical range (more than one standard deviation above average) for the second consecutive week. Historically, unusually high levels of neutral sentiment have been followed by better-than-average S&P 500 returns (an average six-month gain of 7.2%). The historical results of unusually high and low AAII Sentiment readings can found in this month’s AAII Journal.
The ongoing streak of 25 consecutive weeks with neutral sentiment readings above 30.5% is the fourth-longest in the survey’s history. The only longer such streaks were an 82-week stretch in 1987 and 1988, a 65-week stretch in 1997 and 1998 and a 28-week stretch in 1993.
This week’s special question asked AAII members what factors are most influencing their six-month outlook for stocks. Several members listed more than one factor. The economy topped the list, named by 28% of respondents. Many of them (17% of all respondents) cited sustained growth or expectations for continued growth. The market was a very close second, named by slightly more than 27% of all respondents. About 9% of all respondents said valuations were high, though there were others who were encouraged by the market’s resiliency and upward momentum. The geopolitical picture, especially Iraq and Russia, was cited by just fewer than 17% of all respondents. Frustration with politics also remained a common refrain, with 13% of respondents expressing displeasure with either political infighting or the president’s policies.
This week’s AAII Sentiment Survey results:
- Bullish: 37.2%, up 2.0 percentage points
- Neutral: 41.7%, up 1.0 percentage points
- Bearish: 21.1%, down 3.0 percentage points
- Bullish: 39.0%
- Neutral: 30.5%
- Bearish: 30.5%
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:https://www.aaii.com/
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.