What These 3 Sentiment Surveys Are Saying About Stocks

As the stock market battles back from its late-August lows -- and approaches the most bullish time of the year -- we're noticing that sentiment is recovering at a rapid pace, based on several of the surveys we follow at Schaeffer's. For example, in last week's Investors Intelligence (II) survey -- which looks at a collection of investor newsletters to get a sense of how experts feel about the market -- the percentage of bulls spiked by 6.2 percentage points to 43.7%. This is the fourth consecutive week in which optimism has increased.

The table below -- courtesy of Schaeffer's Quantiative Analyst Chris Prybal -- visually depicts the rising percentage of bulls against the falling percentage of bears, according to II. As you can see, the S&P 500 Index's (SPX) recovery has corresponded to the reversal in sentiment.

The American Association of Individual Investors (AAII) also puts out a weekly sentiment survey, measuring the mood among the organization's membership. The latest results (which came out on Thursday) display the highest bullish reading since Feb. 26 (40.4%) and the lowest bearish reading since Feb. 19 (20.6%). Also, the percentage of bulls has increased in each of the past three weeks, while the percentage of bears has decreased for four consecutive weeks.

Finally, the National Association of Active Investment Managers (NAAIM) Exposure Index -- which reflects the average exposure to U.S. equity markets among the group's members -- advanced to 56.71 from 35 over the past week, marking its highest perch since Aug. 5. Also worth noting on the chart below, the 10-week moving average on NAAIM sentiment has stopped declining, suggesting the trend is beginning to change course.

As Schaeffer's Senior VP of Research Todd Salamone observed in this week's Monday Morning Outlook, "...the sentiment backdrop warrants long exposure, as the negative sentiment extreme we observed in late September and earlier this month appears to have climaxed. Historically, after such a climax in negativity, a powerful sustained rally becomes a strong possibility." In other words, the improving sentiment backdrop discussed above could provide a tailwind for stocks going forward. (But just in case of short-term headwinds, Todd also explained the best way to hedge your bets in the current environment.)