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Mark Hulbert
Feb. 15, 2011, 12:01 a.m. EST
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By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "â? Slowly, but at least so far surely, bullish sentiment continues to grow. It is now perilously close to dangerously high levels.
Other things being equal, of course, this from a contrarian view is bad news for the stock market "â? at least for the short term.
In fact, about the only contrarian-based leg the market has left to stand on is the strangely split nature of many analysts' forecasts. This split nature is what I devoted one of my columns to earlier this month: Many of the market timers whose optimistic short-term forecasts are pushing sentiment into the dangerously bullish zone are nevertheless bearish on the stock market's intermediate and longer-term prospects. ( Read my Feb. 4 column.)
This makes it more difficult than usual to determine what the underlying consensus truly is, and in turn, for contrarian-oriented investors to figure out what to be contrary to.
Still, whenever in recent years short-term bullishness has risen to as high as it has become in recent days, the stock market soon encountered rough going.
The sentiment index that best illustrates this dangerously high bullishness is the average recommended equity exposure among market timers who focus on the Nasdaq market (as measured by the Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI). This index is a good barometer because the Nasdaq market is particularly sensitive to mood changes among retail investors.
The HNNSI is currently 73.3%, up from 46.7% as recently as the first week of February. The last time the index was any higher for an extended period was late last April and early May, which came just prior to the infamous Flash Crash and the ensuing May-June market correction.
To be sure, the sentiment situation could still resolve itself in a way that gives the bull market an additional lease on life. For example, in early November the HNNSI did briefly rise to 80%, but then quickly pulled back. In just two weeks after hitting 80%, in fact, this sentiment index had dropped back to 60% "â? from which lower level the market was able to mount a rally that added a thousand points to the Dow over the subsequent three months.
The same could happen again, of course. So the next few days will be crucial from a contrarian point of view.
But, with early precincts reporting, prospects look ominous. The stock market has looked to be increasingly fatigued in recent sessions "â? and, yet, far from falling back, bullishness has continued to rise.
That's not indicative of the wall of worry that bull markets like to climb.
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.
Consolidation in the energy services sector continues with the acquisition of a John Woods unit that brings new life to old energy resources.
5:14 p.m. Feb. 14, 2011
"Mark Hulbert: Bullish sentiment is high "â? maybe too high http://on.mktw.net/fQ0CIQ" 12:02 a.m. EST, Feb. 15, 2011 from MktwHulbert
"Mark Hulbert: Investing without making any forecasts http://on.mktw.net/f8NqfY" 12:44 a.m. EST, Feb. 11, 2011 from MktwHulbert
"Mark Hulbert: Will market soon surpass its all-time high? http://on.mktw.net/h7ibmA" 12:51 a.m. EST, Feb. 9, 2011 from MktwHulbert
"Mark Hulbert: Corporate insiders steadfastly bearish http://on.mktw.net/gRG1nJ" 12:25 a.m. EST, Feb. 8, 2011 from MktwHulbert
"Mark Hulbert: Many predict strength now, trouble later http://on.mktw.net/idzeC4" 1:17 a.m. EST, Feb. 4, 2011 from MktwHulbert
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