AAII Sentiment Survey: Neutral Sentiment Reaches Four-Month High

Neutral sentiment rose to a four-month high in the latest AAII Sentiment Survey. Pessimism about the short-term direction of stock prices topped optimism for the second consecutive week.

Bullish sentiment, expectations that stock prices will rise over the next six months, rebounded to 31.2%. Despite the three-percentage-point rise, bullish sentiment stayed below its historical average of 39% for the second consecutive week.

Neutral sentiment, expectations that stock prices will stay unchanged over the next six months, jumped 4.7 percentage points to 35.0%. This is the highest neutral sentiment has been since December 22, 2011. It is also the third time in four weeks that neutral sentiment has been above its historical average of 31%.

Bearish sentiment, expectations that stocks prices will fall over the next six months, fell to 33.8%. Even with the 7.7-percentage-point plunge, bearish sentiment stayed above its historical average of 30% for the second consecutive week.

The difference between bullish and bearish sentiment, the bull-bear spread, narrowed to -2.6 percentage points. This is the first time the spread has been negative for two consecutive weeks since December 1, 2011.

Neutral sentiment readings at the current level have been unusual over the past few years. Since the bear market ended in March 2009, neutral sentiment has only registered 35% or higher six times. The recent return of volatility to the market combined with conflicting signals about the U.S. and the global economy are having an impact on individual investor sentiment.

This week's special question asked AAII members whether gasoline's rise to a national average of nearly $4 per gallon has changed their short-term outlook for stocks. The majority of respondents said it has not. A minority, however, said they have become more bearish on stock prices.

Here is a sampling of the responses:

• "I think the relationship between the price of gas and stock prices is overblown. Gas is just one of many metrics affecting sentiment."
• "It has not affected my sentiment. I am carefully watching earnings reports and cash flows."
• "The short-term price of gas will just add some minor volatility to a market driven by other, more serious issues."
• "No change. I feel the price hike is temporary."
• "The rising price of gasoline is eating into discretionary spending for many."
• "At some point, the expenses for fuel will affect the purchase of other items."

This week's AAII Sentiment Survey Results:

• Bullish: 31.2%, up 3.0 percentage points
• Neutral: 35.0%, up 4.7 percentage points
• Bearish: 33.8%, down 7.7 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

Charles Rotblut. CFA is a Vice President with the American Association of Individual Investors and editor of the AAII Journal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.