AAII Sentiment Survey: Unusually High Optimism for Second Week

Optimism among individual investors about the short-term direction of the stock market is at an unusually high level for the second consecutive week despite declining slightly. Pessimism and neutral sentiment both rebounded.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 0.5 percentage points to 48.9%. Optimism is above its historical average of 38.0% for the 16th week out of the past 18 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, increased 0.4 percentage points to 27.5%. Neutral sentiment remains below its historical average of 31.5% for the 57th time out of the past 61 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, increased 0.1 percentage points to 23.6%. Bearish sentiment is below its historical average of 30.5% for the sixth time this year.

As noted above, bullish sentiment remains at an unusually high level (more than one standard deviation above its historical average). The breakpoint between typical and unusually high readings is 48.0%. Historically, unusually high levels of bullish sentiment have been followed by lower-than-average six- and 12-month returns for the S&P 500 index.

The ongoing coronavirus pandemic, including the distribution of vaccines, continues to have a big influence on individual investors’ outlook for the stock market. Other factors include the new administration’s policies, economic trends, the current level of valuations and economic stimulus.

In this week’s special question, we asked AAII members how the Nasdaq composite’s recent volatility has affected their shorter-term outlook for stocks.

Half of respondents (50%) say that the Nasdaq’s recent volatility is having little to no impact on their shorter-term outlook. This compares to 12% of respondents who say that their shorter-term outlook for stocks is more bearish and that they are being more cautious. About 11% of respondents say that they are moving out of technology stocks while about 10% of respondents say that they have been using the dips as buying opportunities. In addition, about 7% of respondents say that they are shifting more toward value stocks and 7% of respondents say that their short-term outlook is more bullish.

Here is a sampling of the responses:

• “I am looking at trimming back a little on tech stocks generally, but I also accept that some individual stocks I own will have higher-than-average volatility. However, that does not negate their potential for long-term gains, so I just have to ride the roller coaster if I want to see that return.”
• “It affords an opportunity to invest in some highly profitable companies at slightly less inflated valuations. In my case, I initiated a small position in such a firm: a semiconductor company with an above-market-average dividend and lower-than-market-average price-earnings (P/E) ratio.”
• “What goes up must come down. I am one of those who remembers when the Nasdaq was mostly start-ups and small caps. Maybe strong performance of small caps over the past few months—at least as measured by my iShares Core S&P Small-Cap ETF (IJR)—is what the future holds. Small-caps have historically outperformed in a recovering environment.”
• “It has not affected my long-term outlook, but I do see the Nasdaq having a lot of volatility over the next few months.”

See more Sentiment Survey results.