Small Investor Sentiment Dips, Still High Historically

By Charles Rotbout, CFA & Vice President with AAII

Bullish sentiment declined 3.5 percentage points to 52.3% in the latest AAII Sentiment Survey. Despite the dip, optimism that stock prices will rise stayed above its historical average of 39% for the 19th consecutive week, matching the streak set in the second half of 2004.

Neutral sentiment, expectations that stock prices will be essentially flat over the next six months, slipped 1.6 percentage points to 24.2%. This was the 23rd consecutive week that neutral sentiment has been below its historical average of 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 5.2 percentage points to 23.4%. Though this is a four-week high for pessimism, pessimism is below its historical average for the 16th time in the past 18 weeks.

Though there was a decline this week, bullish sentiment remains in the range that has largely held over the past six weeks. This has resulted in the eight-week moving average reaching 53%, its highest level since January 6, 2005. High levels of bullish sentiment have been correlated with market reversals, but other indicators should be considered before making a market forecast.

As noted above, bullish sentiment has been above its historical average for 19 consecutive weeks, matching the streak set during the period of August 26 through December 30, 2004. A┬árecord streak of 42 consecutive weeks occurred during the period of May 29, 2003, through March 11, 2004, when investors realised that a recovery from the decade’s first bear market was fully underway.

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