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Investor Bearish Sentiment at 1 Year Highs

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The results from the latest AAII Sentiment Survey saw pessimism rise to its highest level in a year. In addition, optimism moved toward the bottom of its typical historical range.

Bullish sentiment, expectations that stock prices will rise over the next 6 months, decreased 1.8 percentage points to 28.1%. This is the 3rd consecutive wk that Bullish sentiment is below the historical average of 38.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose slightly by 0.2 percentage points to 31.1%. This minor uptick puts Neutral sentiment only slightly under the historical average of 31.5%.

Bearish sentiment, expectations that stock prices will fall over the next 6 months, increased by 1.5 percentage points to 40.7%.

Pessimism was last higher on 30 September 2020 (43.1%). This is the 3rd consecutive wk and the 8th time out of the last 9 wks that Bearish sentiment is above the historical average of 30.5%.

Bearish sentiment is now at a high level. Historically, unusually high levels of pessimism have been followed by above-average and above-median 6-month returns in the S&P 500 index. Bullish sentiment, meanwhile, is at the bottom of its typical range. The breakpoint between typical and unusually low bearish readings is 28.0%.

The rise in pessimism comes as major indexes have pulled back from their record highs and experienced their 1st 2% daily drop in many months.

Also playing a role are the return to normalcy from the coronavirus pandemic; monetary, fiscal stimulus and inflationary pressures; and earnings, valuations and the Biden administration’s initiatives.

The special question, we asked AAII members if they thought the Federal Reserve would be right to start tapering its bond purchases in November.

Fully 79% say that they feel the Fed would be correct in tapering bond purchases. Many respondents feel that the primary reason tapering is necessary is to reduce market liquidity and inflation. By doing this, respondents hope that the market will adjust without any major interference from the Fed.

This compares to 10% of respondents who give a conditional response about what the Fed would do.

About 8% of responses express that the Fed should not taper bond purchases. One of the main concerns is that it is too early with the ongoing coronavirus pandemic.

Here is a sampling of the responses:

  • Yes. The economy seems to have rebounded nicely and inflation is probably going to continue above 2% annually.
  • “I think there is some optimism in the market, but not to a euphoric level. So, there is probably more room to run up.”
  • “No, unless most supply chain issues are resolved, and unemployment levels are greatly reduced.”

The Sentiment Survey results:
Bullish: 28.1%, down 1.8 points
Neutral: 31.1%, up 0.2 points
Bearish: 40.7%, up 1.5 points

Historical averages:
Bullish: 38.0%
Neutral: 31.5%
Bearish: 30.5%

Have a prosperous day, Keep the Faith!

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Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge Including Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he is the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.