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By Charles Rotblut, CFA, AAII

Bearish sentiment surged from being below average to an unusually high level in the latest AAII Sentiment Survey. Meanwhile, bullish sentiment plunged to a seven-month low.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 10.0 percentage points to 28.1%. This is the lowest level of optimism registered by our survey since September 22, 2011. The historical average for bullish sentiment is 39%.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, fell 3.7 percentage points to 30.3%. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, surged 13.8 percentage points to 41.6%. This is the highest level of pessimism registered by our survey since October 6, 2011. It also the first time bearish sentiment has been above its historical average of 30% since December 29, 2011.

The difference between bullish and bearish sentiment, the bull-bear spread, fell to -13.5 percentage points. This ended a 14-week streak of positive double-digit differentials, the longest such streak since March 2004. It is also the first negative double-digit spread since last October.

Though there have been underlying concerns about the pace of economic growth, the disappointing March jobs data appears to have brought these worries to the surface. Adding to individual investors’ nervousness are the ongoing European sovereign debt crisis, rising gasoline prices, concerns that the market’s rally may be losing steam and uncertainty about China’s economy.

At current levels, bearish sentiment is unusually high (one standard deviation above average), but not at levels that we would consider to be a contrarian signal. It may be worth noting that bearish sentiment stayed above 40% for most of last August and September.

This week’s special question asked AAII members what their expectations for first-quarter earnings were. Responses were mixed, though the majority anticipated companies would report higher profits. Some respondents thought earnings would be flat relative to the fourth quarter. Others were bracing for either below-forecast earnings or a decline in profits.

Here is a sampling of the responses:

  • “Most companies will meet or exceed analyst expectations.”
  • “First-quarter earnings will be up slightly from the fourth quarter; they will also be positive for most companies.”
  • “I’m expecting earnings will be slightly up for most companies. Any major surprises and the market will head down.”
  • “Not as strong as in the recent past, but still positive.”
  • “Lower than expectations in most cases and throughout most industries.”

This week’s AAII Sentiment Survey results:

  • Bullish: 28.1%, down 10.0 percentage points
  • Neutral: 30.3%, down 3.7 percentage points
  • Bearish: 41.6%, up 13.8 percentage points

Historical averages:

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

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