Sign in
Become a MarketWatch member today
Mark Hulbert
March 22, 2010, 12:01 a.m. EDT · Recommend (2) · Post:
View all Mark Hulbert "º
"¹ Previous Column
Using the 200-day moving average
First Take "º
EADS pumps Pentagon for Boeing rematch
By Mark Hulbert, MarketWatch
ANNANDALE, Va. (MarketWatch) -- Even though the stock market this past week eclipsed its January high, bullishness among investment advisers remained below the extreme levels seen then.
That would normally suggest to contrarians that the bull market has more room to run, but on this occasion contrarians have less than a normal level of confidence in this conclusion.
That's for two reasons: The first is that, even though bullishness is currently lower than its peak of a few months ago, it nevertheless remains quite high. Secondly, a survey of past bull-market peaks shows that sentiment tends to reach its peak well before the market itself tops out. So one cannot conclude that the market is not topping out just because bullishness is lower now than a couple of months ago.
Consider the Hulbert Stock Newsletter Sentiment Index (HSNSI), which reflects the average recommended stock market exposure among a subset of short-term stock market timing newsletters tracked by the Hulbert Financial Digest. It currently stands at 53.0%.
Though that is 12 percentage points below the HSNSI's early-January peak, it nevertheless remains higher than 99% of this sentiment index's readings over the last three years. So sentiment looks favorable today only in comparison to the even higher levels of bullishness witnessed in January -- otherwise, current levels would appear to be a source of some concern.
The other reason to question a bullish interpretation of recent sentiment trends: Sentiment often reaches it highest levels well before the market itself tops out. That, at least, is the conclusion that emerged from a major study of sentiment trends at past bull-market tops.
To come up with a list of such tops, I relied on the precise definition employed by Ned Davis Research, the institutional research firm. There have been 14 tops since the mid-1960s, according to the firm's definition. I then analyzed the behavior of four different sentiment measures on the occasions of those bull market tops.
Besides the HSNSI, I focused on (1) the well-known survey of newsletter sentiment conducted by Investors Intelligence, (2) the survey of individual investors conducted by the American Association of Individual Investors, and (3) the CBOE's Market Volatility Index /quotes/comstock/20m!i:vix (VIX 16.97, +0.35, +2.11%) , which reflects expectations of future volatility among options traders, and which is often referred to as an "investor fear gauge."
I found that, more than two-thirds of the time, sentiment hits its peak well before the market's top -- 70% of the time, in fact. On no occasion, for example, did the HSNSI reach its peak after the market did; on the contrary, it on average peaked out 55 calendar days prior -- or about two months. Similar statistics for the other sentiment indices are provided in the accompanying table.
On the one hand, as you can see from the table, the length of time that has transpired since the peak of bullishness earlier this year is moderately longer than the historical average. As this length of time increases, of course, it then becomes less and less likely that the market is in the process of topping out.
On the other hand, as is also clear from the table, we still have a long ways to go before we exceed the confines of the historical precedents.
The bottom line? It is mildly good news that bullishness is not at the very high levels seen a couple of months ago. But that good news may end up being nothing more than the silver lining in a very dark cloud.
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.
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of investment advisory newsletters. The HFD became a service of MarketWatch in April 2002. In addition to his regular columns for MarketWatch, Hulbert writes a column on investment strategies for the Sunday New York Times, a monthly column for Barron's.com and a column on newsletters for the Journal of the American Association of Individual Investors. Dow Jones and MarketWatch are launching a weekly newsletter, Hulbert on Markets: What's Working This Week.
Are these guys gluttons for punishment?
3:48 p.m. March 19, 2010 | Comments: 34
- GreenMachine09 | 11:21 p.m. March 21, 2010
This Week in China
Hong Kong is odd man out on tightening
On the Markets
Sentiment conditions not so bullish
Marsh on Monday
China and Germany: uneasy parallels
This Week in India
Sensex nears year's high
Commodities Corner
Waiting for silver's big break
On Retirement
Two major barriers to your retirement plans
Vital Signs
What health reform means for you
Digital Dvorak
Read Full Article »