Are investors getting overly optimistic again?

Just as I was observing U.S. stocks getting to a point that I would expect to see stock indexes pull back at least a little or drift sideways, I noticed that investor sentiment readings last week were unusually bullish. 49.4% of investors polled by AAII last week believe stocks will rise in the next 6 months. Only 21.1% were bearish, believing stocks would fall.

That’s an unusual asymmetry between the percent of individual investors believing stocks will rise over those who believe they will fall. You can see the historical averages below.

AAII investor sentiment survey

source: http://www.aaii.com/sentimentsurvey?adv=yes

Investors tend to get more bullish about stocks after they have risen recently (and they have). They tend to get more bearish after stocks have fallen and they are losing money – and fear losing more.

It isn’t a perfect indicator, but the majority tends to feel the wrong feelings at the wrong timeThat presents an advantage for those of us who don’t, and are aware of how behavior signals trends, but a challenge for advisers and individual investors as they try to modify their behavior to avoid it.

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