Bullish Fatigue Wanes as Investor Pessimism Hits a Wall

The bearish sentiment among individual investors appears to be reversing, with optimism showing signs of stabilization, according to the latest AAII Sentiment Survey. The survey, conducted by the American Association of Individual Investors, tracks the sentiment of retail investors regarding the U.S. equity market over a six-month horizon. The results indicate a shift in the balance of investor sentiment, with bearish forecasts declining relative to historical norms while bullish expectations show some resilience [1].

Bearish sentiment, defined as the proportion of respondents who expect stock prices to fall over the next six months, increased by 3.9 percentage points to 43.4% in the latest survey. This figure remains above the historical average of 31.0%, but the rate of increase has slowed compared to previous weeks, suggesting a moderation in pessimism. The elevated bearish sentiment, however, continues to reflect the broader economic uncertainty and market volatility that have characterized the past year [1].

Conversely, bullish sentiment—measured as the percentage of investors who expect stock prices to rise—dropped 1.9 percentage points to 32.7%, still below its historical average of 37.5%. This decline marks the sixth time in the past 10 weeks that bullish sentiment has fallen below the long-term benchmark. While this suggests continued caution among investors, the fact that the decline is slowing indicates that market optimism may be stabilizing [1].

Neutral sentiment, representing the percentage of investors who expect stock prices to remain largely unchanged, also fell by 2.0 percentage points to 23.9%. This continues a long-term trend, with neutral sentiment now below its historical average of 31.5% for the 59th consecutive week out of 61. The decline in neutral sentiment, though modest, underscores the increasing polarization of investor views and the diminishing number of investors taking a wait-and-see approach [1].

The bull-bear spread, calculated as the difference between bullish and bearish sentiment, narrowed to -10.7% in the latest survey, a decrease of 5.8 percentage points from the previous week. The spread has remained below its historical average of 6.5% for 29 of the past 31 weeks, reflecting the ongoing dominance of bearish sentiment in the market. However, the recent moderation in the pace of bearish gains suggests the potential for a shift in the market's tone [1].

In response to a special question posed by the AAII regarding the perceived state of the economy, a significant portion of respondents described the current economic environment as "mixed," with 54.7% of investors selecting that option. Only 34.9% described the economy as "good," while 4.0% said "great" and 5.7% labeled it "lousy." These results highlight the cautious but not entirely negative sentiment that many investors hold regarding the broader economic outlook [1].

These shifts in investor sentiment are being closely watched by analysts and market participants as potential indicators of a near-term market correction or recovery. The data suggests that the bearish consensus, while still strong, is showing signs of fatigue, which could support a potential rebound in equities if broader economic indicators align with improved investor confidence [1].

Source:

[1] AAII Sentiment Survey: Pessimism Reverses (https://www.aaii.com/latest/article/339584-aaii-sentiment-survey-pessimism-reverses)