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MarketWatch First Take
April 29, 2011, 11:08 a.m. EDT
By MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "â? Bullishness among investment advisers is now at its highest level in nearly five years.
That's a worrisome sign, according to contrarians, since it means that there is virtually no "wall of worry"? left for this bull market to climb.
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 now stands at 67.2%, which means that the average stock-market timer is allocating two-thirds of his or her equity portfolio to the stock market.
To put this much bullishness in perspective, consider that the average HSNSI level since this bull market began in March 2009 is just 34.6%. So the current HSNSI level is nearly double what has been this bull market's norm.
To be sure, high levels of bullishness don't automatically doom the market, since sentiment isn't the only factor that influences its direction. But, over the 25 years for which the Hulbert Financial Digest has data for the HSNSI, high levels on average are followed by below-average returns for the overall market.
It's also important to bear in mind that contrarian analysis is only a short-term market-timing tool. Research conducted by the Hulbert Financial Digest has shown that sentiment's greatest explanatory power exists over time horizons of just a couple of weeks to as much as a couple of months.
But, to the extent contrarian analysis is right this time around, the market is likely to be a below-average performer over the next few weeks.
"â? Mark Hulbert
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