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By Charles Robtlut, CFA, AAII

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 3.5 percentage points to 41.8% in the latest AAIISentiment Survey. This is first the time that optimism has been above its historical average of 39% since April 14, 2011.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, rose 2.1 percentage points to 33.5%. This is a five-week high for neutral sentiment. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, dropped 5.5 percentage points to 24.7%. This is the lowest level of pessimism since January 13, 2011. It is also the just the second time in 20 weeks that bearish sentiment has been below its historical average of 30%.

Bearish sentiment has plunged by a cumulative 23.0 percentage points since setting a 2011 high of 47.7% on June 9. Bullish sentiment has improved 17.4 percentage points over the same period. A combination of factors has led to this shift, including rebounding stock prices and falling gasoline prices. Optimism is close to its historical average, however, and many investors still have concerns about the pace of economic growth and the ongoing debate over the debt ceiling.

This week’s special question asked AAII members if they will be more focused on the ongoing debate over the U.S. debt ceiling or on quarterly profits and earnings guidance. The overwhelming majority of respondents said they will be more focused on earnings. A sizeable minority said they would be more focused on the debt ceiling, however. A few respondents said they were either paying equal attention to both or were more focused on other market factors, such as the trend in stock prices.

Here is a sampling of the responses:

  • “I’m focused on the debt ceiling debate, because a U.S. default will cause major problems for the stock market.”
  • “Earnings reports will influence my decisions. The debt ceiling debate will (I predict) soon be settled one way or the other.”
  • “Earnings until the decision is made to default; then all bets are off!”
  • “If the elected officials can’t reach agreement on the U.S. debt, I fear many bad things will happen to the U.S. economy.”
  • “The absolute value of earnings will be determined by the U.S. dollar. I’m a concerned as to what happens with the United States’ credit rating and interest rates.”

This week’s AAII Sentiment Survey Results:

  • Bullish: 41.8%, up 3.5 percentage points
  • Neutral: 33.5%, up 2.1 percentage points
  • Bearish: 24.7%, down 5.5 percentage points

Historical averages:

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

(Chart provided by pragcap.com)

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