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Mark Hulbert
July 6, 2010, 12:01 a.m. EDT · Recommend (6) · Post:
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Contrarian reaction to gold's big plunge
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By Mark Hulbert, MarketWatch
ANNANDALE, Va. (MarketWatch) -- Bad news, contrarians.
At least one sentiment indicator is suggesting that there's still too much bullishness, despite the general gloom that otherwise has descended on Wall Street in the wake of recent market weakness. From a contrarian point of view, of course, it is bearish when there is too much bullishness.
This indicator to which I refer is based on net fund flows into and out of exchanged-traded funds that provide investors with a leveraged exposure to the U.S. stock market. One example of such a fund is the ProShares UltraPro S&P 500 fund /quotes/comstock/13*!upro/quotes/nls/upro (UPRO 117.00, +5.74, +5.16%) , which is designed to triple the performance of the S&P 500 index /quotes/comstock/21z!i1:in\x (SPX 1,035, +12.57, +1.23%) .
According to a recent study by TrimTabs Investment Research, "leveraged U.S. equity ETF investors have a knack for zigging precisely when they should zag." Based on data back to 2006, the study found that "the S&P 500 dives an average annualized 13.7% in the week following an aggregate leveraged U.S. equity ETF inflow, and it surges an average annualized 10.3% in the week following an outflow."
This is bad news, given the latest data: According to TrimTabs estimates, which cover the week through last Thursday's close, investors poured $434 million of new money into those ETFs that provide 3-to-1 leverage on the long side of the U.S. equity market, while pulling $355 million out of ETFs that provide 3-to-1 leverage on the short side.
In other words, the average investor in these leveraged ETFs is betting that the stock market will soon rally. Given their dismal track record, that's a bearish omen for the market itself.
Can the bearish conclusion of this sentiment indicator be reconciled with the generally bullish message of other sentiment indicators? I think it can, provided we recognize that the various sentiment indicators have predictive powers over different time horizons.
For example, the indicator based on leveraged ETFs' flows works over a very short-term time horizon. TrimTabs found that its predictive power steadily weakens as the forecast horizon extends beyond one week, and "peters out after six weeks."
In contrast, consider the sentiment among investment newsletter editors (as represented by the Hulbert Stock Newsletter Sentiment Index, or HSNSI) or among individual investors (as represented by the American Association of Individual Investors' weekly survey of their members' sentiment). Both are showing less bullishness, and more bearishness, than at any time since the March 2009 stock market low that marked the end of the 2007-2009 bear market.
In econometric tests I've run on 25 years' worth of HSNSI data, I discovered that its greatest predictive power is at the three-month time horizon. I found a similar time horizon when analyzing the sentiment survey conducted by the American Association of Individual Investors (AAII).
So it's possible that these indicators' otherwise conflicting messages could all end up getting it right. That would mean that the stock market would decline over the next week or so but nevertheless be higher in three months' time than where it stands now.
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 hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now.
Sam's Club, a unit of Wal-Mart Stores Inc., said Tuesday it was testing a program to offer qualified members small-business loans in amounts ranging from $5,000 and $25,000. The service would be offered online through a partnership with Superior Financial Group
17 min ago12:09 p.m. July 6, 2010 | Comments: 2
- emil11 | 11:29 p.m. July 5, 2010
"Mark Hulbert: Contrarian indicator offers bearish picture http://on.mktw.net/9i4fXe" 11:06 p.m. EDT, July 5, 2010 from MktwHulbert
"Mark Hulbert: Contrarian reaction to gold's big plunge http://on.mktw.net/ceDhjC" 11:03 p.m. EDT, July 1, 2010 from MktwHulbert
"Mark Hulbert: The market is on the edge of overvalued http://on.mktw.net/b81Z6M" 11:35 p.m. EDT, June 30, 2010 from MktwHulbert
"Mark Hulbert: Bull market holding on by a thread http://on.mktw.net/9nLUGM" 11:45 p.m. EDT, June 29, 2010 from MktwHulbert
"Mark Hulbert: Top adviser since 1980 mostly in cash http://on.mktw.net/9HCBXE" 11:07 p.m. EDT, June 28, 2010 from MktwHulbert
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