E-Trade Survey Shows Retail Investors Are Optimistic

Stocks rallied on Wednesday as good earnings reports helped the market regain momentum after Tuesday's reversal. That means we can continue our discussion on how overly optimistic some investors have become. The table below shows an E-Trade of survey of retail investors. Some of the responses are remarkable. 9% of investors think stocks will rise at least 15% this quarter. That's over 60% in annualized gains. I don't see how anyone can think that through and decide it's the most likely scenario. That type of bullishness is associated with bull market peaks, not troughs. Bull markets are built on skepticism and bear markets are built on complacency. In total, 77% thought stocks would rally in Q1 and 9% thought they would fall. Therefore, a 0.1% decline is considered to have the same likelihood as a 15% increase. This was the most euphoria ever expressed in this survey.

Although the bulls have been correct so far, there aren't many more bears that can switch over to becoming bulls to drive the market much higher. One oddity with this survey is 68% said they were bullish and 32% said they were bearish. This means 9% of the people said they were bearish and think stocks will go up in Q1. Even the bears think stocks will go up! The other part of the survey is about monetary policy. 66% think the economy is strong enough for a rate hike in Q1 and 9% think it's not strong enough. This makes sense because the Fed will likely raise rates in March.

Investors were then asked if markets outside of America appeal to them. 62% were positive on international markets and 14% were negative. Currently, u.s. stocks are much more expensive that international equities, so it makes sense, for the long term, to buy stocks abroad. However, just because these E-Trade investors like international markets doesn't mean they are increasing their weight in them. I wouldn't assume they are increasing their international weight since they are even more bullish on U.S. stocks.