Thursday’s release of the AAII investor sentiment survey showed an increase of bullish investors to 45% from last week’s 31%. Bearish sentiment decreased to 32% from 39% the previous week. While both the increase in bulls and decrease in bears were fairly pronounced, the real threat to the bull market will occur once the bulls exceed 50%. At the current rate of 45%, bullish sentiment is still fairly contained and signs of “irrational exuberance” are not yet evident.
Yet the 14% jump in bullish sentiment and 7% drop in bearish sentiment tell us that investors’ animal spirits are rising. The market has rallied for three weeks without a meaningful pullback and the latest investor sentiment numbers tell us that the market is getting closer to a correction. Accordingly, this would be a good time to do some pruning of investment portfolios and raising stop loss levels.