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Mark Hulbert
Oct. 30, 2009, 12:01 a.m. EDT · Recommend (3) · Post:
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Making Wall Street pay for its mistakes
By Mark Hulbert, MarketWatch
ANNANDALE, Va. (MarketWatch) -- The stock market is certainly showing that it has faith in itself: It roared back during Thursday's sessions with a 200-point gain in the Dow Jones Industrial Average.
But the market has little company: Few of the stock market timers tracked by the Hulbert Financial Digest are themselves showing much faith in the rally continuing.
Though that may strike you as surprising, it is precisely what contrarian theory would suggest: The bull market is climbing a wall of worry.
Consider the average recommended stock market exposure among a subset of the shortest-term stock market timers. As of Thursday night, this average was just 19.4%, which means that these timers on average are recommending that their clients have more than 80% of their equity portfolios out of the market.
This statistic alone suggests that there is plenty of skepticism out there towards this rally. But there's more.
For example, consider the last time that the average recommended equity exposure among these market timers was as low as it is today. That came in early July, more than three months ago, when the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (INDU 9,963, +199.89, +2.05%) was nearly 2,000 points lower than where it is today.
That's amazing, because the usual pattern is for advisers to become more optimistic and exuberant as the market rises, just as they tend to become more dejected and pessimistic as the market declines. In other words, the bull market since July has had no net impact on the sentiment among market timers.
Call it a stealth bull market, if you will.
One of the reasons that sentiment today is no different from where it stood in early July is that the average adviser has only begrudgingly increased his exposure as the market has risen, and yet has been quick to run for the exits at the first sign of trouble.
Consider the reaction to the stock market's mini-correction that began a couple of weeks ago. Even though, at least so far, that correction at its maximum loss had taken just 3.3% off the closing value of the Dow, the average recommended equity exposure among the short-term market timers dropped precipitously -- by more than half, in fact, from 42% to its current 19.4%.
Such eagerness to get out of stocks in the face of only a modest pullback is an indication of just how strong the wall of worry is right now. And it suggests that the sentiment winds continue to be blowing in the direction of higher prices.
On the assumption that contrarian analysis is right in its forecast of a continued rally, how much further might it go and how long might it last? Unfortunately, on both counts contrarian analysis is largely silent; contrarians prefer instead to assess sentiment at each step along the way.
For example, contrarians would likely conclude that the rally was getting rather long in the tooth if the stock market were to quickly tack on several hundred points and advisers reacted by jumping on the bullish bandwagon -- and especially if those advisers stubbornly held on their equity positions in the face of the first two- or three-percent correction.
If, however, advisers continue in coming weeks and months to behave as they have in recent days -- being slow to increase exposure and quick to reduce it -- then contrarians are likely to conclude that this rally can keep on keeping on.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
- dont-get-it | 12:44 a.m. Today12:44 a.m. Oct. 30, 2009
As Washington shapes new regulation aimed at dealing with single institutions that are too big to fail, many lawmakers and administrators seem to be forgetting recent history: namely, everyone was in trouble.
11:12 a.m. Oct. 29, 2009 | Comments: 86
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