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Mark Hulbert
March 22, 2011, 12:01 a.m. EDT
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By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "” The stock market is now higher than where it stood prior to the March 11 Japanese earthquake.
Yet you'd never know that by focusing on Wall Street's mood. On the contrary, the prevailing mood is markedly more somber today than then.
This divergence is a good sign, according to contrarian analysts.
Consider the average recommended stock market 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 just 15.8%, 33.3 percentage points lower than the 49.1% reading that prevailed before the earthquake hit.
Contrarians find this bullish, for several reasons. First, even when the HSNSI stood at 49.1% on the evening of March 10, it was by no means painting a picture of excessive bullishness or exuberance. After all, the average stock market timer at the time was still recommending that clients keep more than half their portfolios out of the equity market.
At just 15.8% today, however, the HSNSI is reflecting even more widespread caution among the market timers "” if not outright bearishness. In other words, there is a quite robust wall of worry for the stock market to climb.
Even more stark has been the drop in bullishness among market timers who focus on the Nasdaq market "” an arena particularly sensitive to mood shifts. The Hulbert Nasdaq Newsletter Sentiment Index (HNNSI) has fallen from 33.3% before the earthquake to minus 41.7% currently "” a drop of 75 percentage points.
In fact, the currently negative HNNSI reading means that the average Nasdaq-oriented stock market timer is recommending that his clients be heavily short the market "” aggressively betting that stocks will decline.
Contrarian analysts, of course, believe that the market typically does not accommodate the majority view. They therefore have not been surprised by the stock market's resilience in the face of the horrible and tragic news coming from Japan "” and would not be surprised if the market exhibits even more strength in the coming sessions.
Another way of looking at the sentiment data, which also leads to the same conclusion: The last time the HSNSI was as low as today was mid September, some six months ago, when the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 12,037, +178.01, +1.50%) was around 1,500 points lower than today. The last time the HNNSI was this low was early last September, when the Nasdaq Composite index /quotes/comstock/10y!i:comp (COMP 2,692, +48.42, +1.83%) was nearly 500 points lower.
Since the normal pattern is for advisers to become more bullish as the stock market rises, it's quite remarkable that the mood today is just as somber as it was then, when the market was a lot lower.
One metaphor that contrarians are fond of: The bull market is a bucking bronco, doing its darndest to throw us off its back on its way across the rodeo ring. The latest sentiment data suggest that it's doing a very good job of just that.
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.
The Allied assault over the weekend on Gadhafi's forces raises questions that many oil traders weren't even asking on Friday.
3:08 p.m. March 21, 2011
"Mark Hulbert: Market now higher than before earthquake http://on.mktw.net/hiiogO" 11:10 p.m. EDT, March 21, 2011 from MktwHulbert
"Mark Hulbert: Old market timing theory, modern insight http://on.mktw.net/eWkCsh" 11:48 p.m. EDT, March 17, 2011 from MktwHulbert
"Mark Hulbert: Gold's strange response to Japan http://on.mktw.net/hoBRwg" 11:07 p.m. EDT, March 15, 2011 from MktwHulbert
"Mark Hulbert: Fear grows "” a contrarian good sign http://on.mktw.net/hr9tVL" 2:02 a.m. EDT, March 15, 2011 from MktwHulbert
"Mark Hulbert: March Madness and your portfolio http://on.mktw.net/iksFk9" 12:23 a.m. EST, March 11, 2011 from MktwHulbert
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