Rotblut: Optimism Rebounds Further, But Still Below Average

Bullish sentiment rose 2.1 percentage points to 35.6% in the latest AAII Sentiment Survey.

This is the second consecutive weekly increase in optimism that stock prices will rise over the next six months. Despite the improvement, bullish sentiment remains below its historical average of 39% for the fourth week in a row.

Neutral sentiment, expectations that stock prices will be essentially unchanged over the next six months, rose 2.8 percentage points to 24.6%. This is the fifth 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, dropped 5.0 percentage points to 39.8%. This was the second consecutive weekly decrease in pessimism. Even with the drop, bearish sentiment is above its historical average of 30% for the 23rd time in 26 weeks.

The level of pessimism continues to pull back from the 2011 high recorded two weeks ago.

Even with the improvement in optimism. a higher percentage of individual investors still expect stock prices to fall over the next six months than those who expect prices to rise. The recent volatility in the markets has created additional uncertainty. This is in addition to the problematic headline risk caused by the slow pace of economic growth and sovereign debt issues (both in the U.S. and in Europe).

This week's special question asked AAII members which sectors or industries they like right now. Energy was the overwhelming favorite. AAII members also expressed a preference for basic materials/commodities, health care, utilities and technology. Many explicitly said they were seeking out dividend-paying stocks.

When the same question was asked in late May, AAII members said they liked energy, health care and technology.

This week's AAII Sentiment Survey results:

• Bullish: 35.6%, up 2.1 percentage points
• Neutral: 24.6%, up 2.8 percentage points
• Bearish: 39.8%, down 5.0 percentage points

Historical averages:

• Bullish: 39%
• Neutral: 31%
• Bearish: 30%

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