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Re: Bullish Information Re. Mark Hulbert in Barron's online 8/7/07
A Contrarian Should Be Bullish on Stocks http://online.barrons.com/article/SB...ne_mutual_fund [subscription required]
Hulbert's arguments strike me as rather powerful, especially when contrasting his noted drop in bullishness now, to the persistence of it in 2000.
A Contrarian Should Be Bullish on Stocks http://online.barrons.com/article/SB...ne_mutual_fund [subscription required]
Originally posted by Hulbert published on 8/7/07
THE STOCK-MARKET DECLINE OVER the last couple of weeks, painful as it undeniably has been, is not likely to be the beginning of a major bear market.
That's not just wishful thinking based on Monday's [8/6/07] impressive rally, in which the Dow Jones Industrial Average soared some 286 points. It is also the conclusion of a contrarian analysis of sentiment among investment newsletter editors.
.
.
As such, contrarian analysis is especially helpful at times like now, when the question everyone is asking themselves is whether a bear market began on July 19, when the Dow Jones Industrial Average closed above 14,000 (for the first, and so far the only, time).
Had the average adviser remained stubbornly bullish in the face of the decline since then, for example, contrarians would have had to conclude that July 19 was in fact the top of the bull market.
But that is not how the typical adviser reacted. Far from sticking to his bullish guns, he almost ran to the exits. That's a bullish sign.
Consider the latest readings of the Hulbert Stock Newsletter Sentiment Index (HSNSI), which reflects the average recommended stock-market exposure among a subset of short-term market-timing newsletters tracked by the Hulbert Financial Digest. As of Monday night, the HSNSI stood at just 5.4%, which means that, on average, the short-term market-timing newsletters are recommending that their clients risk very little in the stock market, instead allocating some 95% of their equity portfolios to cash.
Not only is this 5.4% recommended equity exposure level quite low in absolute terms, it also has fallen markedly over the last couple of weeks. On the day the DJIA closed above 14,000, for example, the HSNSI stood at 50.9%. So in a little more than two weeks' time, the editor of the average short-term market-timing newsletter has reduced his recommended equity exposure by more than 45 percentage points.
On both counts, a contrarian would conclude that the current sentiment picture does not conform to the typical psychological profile of a major market top.
Contrast how newsletter editors have behaved recently with how they reacted in the few weeks following the March 2000 market top. At the time, of course, no one new that it was the top of the market. But as we now know, the Nasdaq Composite's all-time high occurred on March 10 of that year, while the broad market hit its high two weeks later, on March 24.
Believe it or not, the average HSNSI level for the month of April 2000 was higher than in March. And, even more incredibly, the average HSNSI level in May was even higher still.
Now that's stubborn bullishness: The average adviser became even more bullish in the face of the first two months of the worst bear market in decades. That is classic market-top behavior, which is why contrarians were not surprised by what ensued.
Today, in contrast, we're not seeing anything like the stubborn bullishness that was prevalent then. This does not mean that no individual advisers have remained bullish in the face of the market's pullback; some have. But for every stubbornly bullish adviser there have been more who have built up cash; some, by going short, have aggressively bet their portfolios on a continuation of the market decline.
Does all of this guarantee that a bear market won't begin? Of course not. Sentiment is not the only thing that makes the market tick. And, in any case, there are no guarantees in this business.
But sentiment is a powerful determinant of the market's short- and intermediate-term direction. And in this game of probabilities we call investing, it can make a big difference whether the sentiment winds are blowing in or against our sails.
Think of it this way: The editor of the average market-timing newsletter is more often wrong than right at market turning points. To be bearish right now requires you to bet that this time he will uncharacteristically get it right.
That's not just wishful thinking based on Monday's [8/6/07] impressive rally, in which the Dow Jones Industrial Average soared some 286 points. It is also the conclusion of a contrarian analysis of sentiment among investment newsletter editors.
.
.
As such, contrarian analysis is especially helpful at times like now, when the question everyone is asking themselves is whether a bear market began on July 19, when the Dow Jones Industrial Average closed above 14,000 (for the first, and so far the only, time).
Had the average adviser remained stubbornly bullish in the face of the decline since then, for example, contrarians would have had to conclude that July 19 was in fact the top of the bull market.
But that is not how the typical adviser reacted. Far from sticking to his bullish guns, he almost ran to the exits. That's a bullish sign.
Consider the latest readings of the Hulbert Stock Newsletter Sentiment Index (HSNSI), which reflects the average recommended stock-market exposure among a subset of short-term market-timing newsletters tracked by the Hulbert Financial Digest. As of Monday night, the HSNSI stood at just 5.4%, which means that, on average, the short-term market-timing newsletters are recommending that their clients risk very little in the stock market, instead allocating some 95% of their equity portfolios to cash.
Not only is this 5.4% recommended equity exposure level quite low in absolute terms, it also has fallen markedly over the last couple of weeks. On the day the DJIA closed above 14,000, for example, the HSNSI stood at 50.9%. So in a little more than two weeks' time, the editor of the average short-term market-timing newsletter has reduced his recommended equity exposure by more than 45 percentage points.
On both counts, a contrarian would conclude that the current sentiment picture does not conform to the typical psychological profile of a major market top.
Contrast how newsletter editors have behaved recently with how they reacted in the few weeks following the March 2000 market top. At the time, of course, no one new that it was the top of the market. But as we now know, the Nasdaq Composite's all-time high occurred on March 10 of that year, while the broad market hit its high two weeks later, on March 24.
Believe it or not, the average HSNSI level for the month of April 2000 was higher than in March. And, even more incredibly, the average HSNSI level in May was even higher still.
Now that's stubborn bullishness: The average adviser became even more bullish in the face of the first two months of the worst bear market in decades. That is classic market-top behavior, which is why contrarians were not surprised by what ensued.
Today, in contrast, we're not seeing anything like the stubborn bullishness that was prevalent then. This does not mean that no individual advisers have remained bullish in the face of the market's pullback; some have. But for every stubbornly bullish adviser there have been more who have built up cash; some, by going short, have aggressively bet their portfolios on a continuation of the market decline.
Does all of this guarantee that a bear market won't begin? Of course not. Sentiment is not the only thing that makes the market tick. And, in any case, there are no guarantees in this business.
But sentiment is a powerful determinant of the market's short- and intermediate-term direction. And in this game of probabilities we call investing, it can make a big difference whether the sentiment winds are blowing in or against our sails.
Think of it this way: The editor of the average market-timing newsletter is more often wrong than right at market turning points. To be bearish right now requires you to bet that this time he will uncharacteristically get it right.
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