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Mark Hulbert
April 15, 2011, 12:01 a.m. EDT
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By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "” How will we know when the bull market is finally coming to an end?
This is a particularly timely question right now, given the extraordinary cross currents that are buffeting the market. My columns in recent weeks have reflected those conflicting forces, with some of the advisers I've quoted contending that the bull is alive and well, and others arguing that the bull is living on borrowed time.
For insight, I turn to Ned Davis Research, the quantitative research firm, which looks to a basket of indicators to help determine when a market top is imminent.
It is interesting to note that, nearly two years ago, I turned to this same firm for help in answering this very same question. At the time, many were convinced that the market's rally was nothing but a bear-market correction. But Ned Davis, upon analyzing his various indicators of a potential top, concluded that the bull market had further to go. ( Read my Aug. 7, 2009, column. )
What's his firm saying now?
In an interview earlier this week, Ed Clissold, the firm's Global Equity Strategist, said that "” though there are some worrisome signs on the horizon "” for now his firm is giving the bull the benefit of the doubt.
The top-identifying indicators that the firm looks to fall into four major categories, according to Clissold. They are:
Clissold told me that, though stock valuations aren't yet at such an extreme as to cause this category of indicators to flash a sell signal, there are some causes for concern.
One of these causes for concern, according to a letter Davis sent to his institutional clients earlier this week, is that "profit margins on the S&P Industrial Average are at record highs. ... Using data back to 1954, very high profit margins, on average, have not been bullish for stocks, because the series is very mean-reverting."
Another source for concern, which Davis also highlighted earlier this week, is the cyclically adjusted P/E ratio that Yale professor Robert Shiller made famous ( and to which I devoted a column earlier this week .)
At the same time, however, Clissold referred to other valuation measures that suggest stocks are not particularly expensive right now "” such as the P/E ratio based on 12-month earnings (as opposed to the 10-year average that Prof. Shiller prefers).
All in all, a split decision on valuation. As Davis wrote earlier this week: "I can certainly understand the bullish stance of those who argue stocks are still reasonably priced, based upon current earnings. Yet, I don't think that presents a complete picture of potential risks. I am just providing the evidence for clients to make their own decisions."
This is the one category out of the four that, in Davis' opinion, comes closest to yelling "sell." He maintains two sentiment indices, one of which is well into the zone of excessive optimism and the other on the border of that zone. On contrarian grounds, that is worrisome.
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.
Dogged by criticism that the new television network has failed to live up to expectations, OWN is launching six series as a way to show that it has credibility in the rough and tumble TV industry, writes Jon Friedman.
1:18 p.m. Today1:18 p.m. April 15, 2011
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