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Mark Hulbert
Nov. 5, 2010, 12:01 a.m. EDT
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"¹ Previous Column
A retrospective on the Greek debt crisis
First Take "º
Dow back to pre-Lehman level
By Mark Hulbert, MarketWatch
CHAPEL HILL, NC (MarketWatch) "” Now what?
With the stock market at a new bull-market high, we now know that the stock market's weakness over the last six months was nothing more severe than a mere correction within an ongoing bull market.
/quotes/comstock/10w!i:dji/delayed DJIA 11,435, +219.71, +1.96%
Since advisory sentiment was one of the indicators that, throughout the last six months, correctly interpreted the market's weakness as nothing more than a correction, let's take a look at what contrarian analysis is saying about the market now.
Consider the average recommended equity exposure among a subset of the shortest-term stock market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Stock Newsletter Sentiment Index, or HSNSI). Perhaps not surprisingly, given the strength of Thursday's rally, the HSNSI jumped during the day by 20.5 percentage points.
That big a jump would normally be a cause for contrarian concern, but I'm not so sure it is this time: Thursday's rise in sentiment comes after an extraordinary five-week period in which the HSNSI didn't budge at all. And a 20.5 percentage point increase in sentiment over that long a period is not so large as to cause particular contrarian concern "” especially given how strong the market has been of late.
Furthermore, even after Thursday's big jump, the HSNSI remains quite low "” considering that the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 11,435, +219.71, +1.96%) is at new bull-market highs. The HSNSI now stands at 45.7%, for example, which means that the average short-term stock market timer is still recommending that his or her clients allocate more than half of their equity portfolios to cash.
To put this 45.7% into historical context, consider that the HSNSI today is still lower than it was two months ago, when the Dow was trading as much as a thousand points lower. The HSNSI then got as high as 47.5%. Contrarians see evidence of a strong wall of worry that the market timers are more bearish today than then, despite the stock market today being so much higher.
Furthermore, contrast the HSNSI's current level with where it stood in late April, the last time the Dow was trading close to current levels. The HSNSI then was at 65.5%, some 20 percentage points higher. This, once again, is evidence of a strong wall of worry for the bull market to continue climbing.
To use a different analogy: A bull market can be thought of as a bucking bronco in a rodeo, trying its darndest to throw everyone off its back on the way to the other side of the ring. And it's doing an awfully good job of that: Even though the stock market is today back to where it was at the April high, if not higher, the average short-term market timer is nowhere close to being as bullish as he or she was then.
According to contrarian analysis, a market top of more major significance than this last April's will occur when the prevailing sentiment is stubborn bullishness. The dead giveaway that this is the dominant mood will be found in the reactions of short-term market timers in the wake of the first correction off of the market's top: The market timer will refuse to reduce his or her equity exposure, and may even increase it.
That's what happened at the top of the stock market in March 2000, by the way. And we're not seeing anything like that kind of stubborn bullishness today.
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 · Post: Alert Email Print More Mark Hulbert Nov. 3, 2010 A retrospective on the Greek debt crisis Nov. 2, 2010 November by the numbers Nov. 1, 2010 Forecasting which industry will be the leader Nov. 1, 2010 Betting on quality stocks over junk Oct. 29, 2010 The Halloween Indicator kicks into gear Explore related topics Dow Jones Industrial Average Comments Screener About Mark HulbertMark 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 Dow back to pre-Lehman levelThe Dow Jones Industrial Average is back where it was just before Lehman Brothers filed for bankruptcy more than two years ago, offering good omens for Wall Street and for financials, which used to be the market's leaders.
7:51 p.m. Nov. 4, 2010
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