Any market timers on here? Mostly kidding, but I find the AAII Sentiment measures to be interesting. I have heard discussion that the sentiment indicators have value *at extremes* in sentiment/markets.
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AAII Sentiment Survey:
Optimism jumped to its highest level in seven years. Find out how the S&P performed when optimism was previously at this level or higher.
January 4, 2018
Optimism among individual investors jumped to its highest level in more than seven years, according to the latest AAII Sentiment Survey. Pessimism, meanwhile is at its lowest level in more than three years.
Bullish sentiment, expectations that stock prices will rise over the next six months, surged 7.1 percentage points to 59.8%. Optimism was last higher on December 23, 2010 (63.3%). The historical average is 38.5%.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, pulled back by 2.0 percentage points to 24.7%. Neutral sentiment is below its historical average of 31.0% for a fifth consecutive week.
Bearish sentiment, expectations that stock prices will fall over the next six months, fell 5.1 percentage points to 15.6%. Pessimism was last lower on November 6, 2014 (15.1%). The historical average is 30.5%.
Optimism has now risen by a cumulative 30.5 percentage points since hitting a near-term bottom of 29.3% on November 16. Over the same seven-week period, pessimism has fallen by a cumulative 19.6 percentage points.
There have only been 46 weeks with a similar or higher bullish sentiment reading recorded during the more than 30-year history of our survey. The S&P 500 index has a median six-month return of 0.5% following those previous readings, up slightly more times than it has been down.
Historically, the S&P 500 has realized below-average and below-median returns over the six- and 12-month periods following unusually high bullish sentiment readings and unusually low bearish sentiment readings. The magnitude of underperformance has been greater when optimism is unusually high than when pessimism has been unusually low. In both instances, returns have still been positive on both an average and median basis. An updated table with the historical readings can be found in my Investor Update commentary from three weeks ago.
Some individual investors are encouraged by the record highs for the major indexes, the tax cuts and/or the Federal Reserve’s decision to continue raising interest rates at a gradual pace. Other individual investors are concerned about the possibility of a pullback or a more severe drop occurring. Also affecting investor sentiment are earnings growth, economic growth, valuations and the lack of volatility. Washington politics remain at the forefront of many individual investors’ minds.
This week’s special question asked AAII members how big a percentage gain or loss the S&P 500 will realize in 2018. Nearly two out of five respondents (37%) expect the large-cap index to rise between 6% and 10%. An additional 13% of respondents predict the S&P 500 will realize a gain of between 1% and 5%, 14% expect an increase of between 11% and 15% and 7% think the index could rise by 16% or more. Tax reform was the most common reason given for the optimism, followed by economic growth. A little under 7% of respondents think the S&P 500 will end 2018 down by single digits, while 10% believe the index could incur a double-digit percentage drop. Many respondents anticipate greater volatility with a pullback occurring at some point during the year.
Here is a sampling of the responses:
“8% gain. Continued global economic expansion and the U.S. tax cut will likely push equity prices up.”
“Tax reform should boost the S&P 500 by 15%.”
“Tax reform helps, but the market is already ahead of itself. I’d say 6%.”
“I estimate a 10% increase by mid-year, but a pullback late in 2018 with further interest rate increases.”
“5%. My guess is as good as anyone’s. Volatility will increase.”
“It will dip in the 10% range as some of the many events that could provide a catalyst for a drop finally impact the market.”
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