Market Sentiment Gloomy Enough For Rally

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Mark Hulbert

Aug. 27, 2010, 12:01 a.m. EDT · Recommend (1) · Post:

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Contrarian take on the bond market

First Take "º

H-P can knock Dell out of the fight for 3Par

By Mark Hulbert, MarketWatch

CHAPEL HILL, N.C. (MarketWatch) -- From a sentiment perspective, the Dow's dropping below the 10,000 level appears to be the straw that broke the camel's back.

And that's good news: It puts contrarian analysis back solidly on the side of the bulls.

/quotes/comstock/10w!i:dji/delayed DJIA 9,986, -74.25, -0.74% $INDU

When I last devoted a column to stock market sentiment, at the beginning of August, I reported that the veritable "wall of worry" that a bull market likes to climb had weakened considerably. I concluded by saying that the fate of July's rally would depend on whether sentiment quickly dropped back into the pessimism category. ( Read my Aug. 3 column.)

Not only did this drop in sentiment never materialize, but advisers continued to become even more bullish in the sessions following that column. From a contrarian point of view, therefore, recent market weakness has not come as a complete surprise.

Fortunately, however, in recent sessions many advisers have thrown in the towel.

Consider the average recommended domestic equity exposure among a subset of short-term stock market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Stock Newsletter Sentiment Index, or HSNSI). This average currently stands at minus 6.6%, which means that the average short-term stock market timer is actually recommending that his clients allocate 7% of their equity portfolios to shorting stocks.

In early August, in contrast, when advisers were insufficiently worried, the HSNSI stood at 35%. A week after my early-August column, furthermore, the HSNSI got as high as 47.5%.

This means that the average recommended equity exposure has dropped more than 54 percentage points in a little more than two weeks' time.

That should be enough pessimism to support a rally.

In addition, market timers who focus on the Nasdaq market in particular -- and who tend to be an especially volatile bunch -- are even more bearish right now. Their average exposure now stands at minus 50%, which means that they're now allocating half their equity portfolios to an aggressive bet that the market will continue declining.

They may turn out to be right, of course.

But, historically, market timers on average have been wrong more often than they've been right.

I acknowledge that it's not comfortable to step up to the plate when the stock market is acting as dismally as it is right now.

But, to quote Nathan Rothschild's famous phrase, the time to buy is when the blood is running in the streets -- and that's not easy to do, to say the least.

Also, don't forget that you will be perennially late if you wait to invest until it feels easy or comfortable to do so. Just think back to early August, when the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 9,986, -74.25, -0.74%) was trading at the 10,700 level and things felt a lot better.

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.

Add Comment › · Recommend (1) · Post: Alert Email Print More Mark Hulbert Aug. 25, 2010 Contrarian take on the bond market Aug. 24, 2010 A statistical take on the Hindenburg Omen Aug. 20, 2010 Google now aged six as a listed company Aug. 18, 2010 A contrarian take on gold Aug. 6, 2010 Looking to year 3 of presidential cycle Explore related topics Dow Jones Industrial Average Comments Screener About Mark Hulbert

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.

First Take H-P can knock Dell out of the fight for 3Par

Hewlett-Packard Co. may have delivered the knock-out punch to Dell Inc., as the two rivals have engaged in a back-and-forth bidding war for the previously little known data storage developer, 3Par Inc.

5:44 p.m. Aug. 26, 2010 | Comments: 2

Most Popular Most readMost commented Contrarian take on Dow below 10K Bernanke's helicopter could move to new altitude Double dip and other labels don't matter Japan stocks up, yen down on upcoming PM statement U.S. stocks slide on economic pessimism U.S. stocks slide on economic pessimism Maryland posts social media rules for candidates U.S. stock futures gain on drop in jobless claims US Stocks Futures Climb After Jobless Claims Fall H-P raises bid for 3Par, trumping Dell's move Reader Response »

Let's be honest, this is a tough environment and we're all trying to negotiate the (mostly) negative news and make appropriate investment decisions. PollyAnna's (rare) and Dr. Doom's (mostly) offer advice, but you're the "captain" of your investment ship. Where I sit/stand there is no clear path. Trust the principle one - yourself - and never give up. Bill"

- wmonteforte | 11:57 p.m. Aug. 26, 2010

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"Mark Hulbert: Contrarian take on Dow below 10K http://on.mktw.net/cyeE2g" 11:59 p.m. EDT, Aug. 26, 2010 from MktwHulbert

"Mark Hulbert: Contrarian take on the bond market http://on.mktw.net/bSXKfE" 11:14 p.m. EDT, Aug. 24, 2010 from MktwHulbert

"Mark Hulbert: A statistical take on the Hindenburg Omen http://on.mktw.net/c2kpWG" 12:03 a.m. EDT, Aug. 24, 2010 from MktwHulbert

"Mark Hulbert: Google now aged six as a listed company http://on.mktw.net/aSN2y6" 11:12 p.m. EDT, Aug. 19, 2010 from MktwHulbert

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