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Aug. 19, 2011, 12:01 a.m. EDT
By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "” Bottoming is a process, not an event.
If you had any doubt about the truth of this statement, Thursday's plunge should have put it to rest.
/quotes/zigman/627449/delayed DJIA 10,876.49, -114.09, -1.04%
In retrospect, from a contrarian point of view, it was far too suspicious that many were so quick to declare that last week's intra-day low was a bottom. Bottoms are rarely so neat and tidy, and are rarely accompanied by an eagerness to declare it as such.
Consider the average recommended equity exposure among a subset of short-term stock market timers tracked by the Hulbert Financial Digest (as represented by the Hulbert Stock Newsletter Sentiment Index, or HSNSI). At its low last week, this average stood at minus 19.5%, which indicated that the average short-term market timer was then recommending that clients allocate 19.5% of their equity portfolios to shorting the market.
Click to Play $(function () { $("#video_71DF863D-4DBB-4165-A371-A19E8E15D9EC").click(function (e) { e.preventDefault(); MarketWatch.Video.loadAndStartVideo('71DF863D-4DBB-4165-A371-A19E8E15D9EC', 'video_71DF863D-4DBB-4165-A371-A19E8E15D9EC', '287', '162'); }); }); Calling the bottom amid steep selloffs and crashesIt's rare that we're at the bottom when so many market observers are calling one, according to MarketWatch columnist Mark Hulbert, who says bottoms are "a process rather than an event." Laura Mandaro reports. Image courtesy of Getty Images.
Currently, the HSNSI stands at minus 7.5%, or 12 percentage points higher, even though the Dow Jones Industrial Average /quotes/zigman/627449/delayed DJIA -1.04% is now back to the vicinity of last week's mid-week intra-day low.
Even more ominously, from a contrarian point of view: Nearly six of these 12 percentage points came on Thursday, despite the market's 420 point plunge.
On both counts, one gets the distinct impression that there are a not insignificant number of advisers out there eager to jump back into the market at the slightest excuse. This is not reminiscent of the thoroughgoing pessimism and despair that you often see at tradeable bottoms.
If I had to pick one historical parallel to what we're in the midst of now, I am increasingly inclined to pick the period after the Oct. 19, 1987, stock market crash. The closing low of that year's Fall correction, as it turned out, didn't come until early December, six weeks later.
Consider the percentage of bulls in the weekly member survey of the American Association of Individual Investors (AAII) over that period of time. (The Hulbert Financial Digest wasn't itself calculating its daily sentiment index at the time.) In the first weekly survey after 1987's Black Monday, there were 39% bulls. That quickly jumped to 47% bulls over the next two weeks, as the market appeared to be recovering from that Crash.
But, in true contrarian fashion, that eagerness to jump back on the bullish bandwagon was a bad omen. And the market proceeded to slip back down.
By the time of the early-December low, this bullish percentage had fallen to 25%. And, one week after that bottom, despite the market being markedly higher, that percentage had fallen even further to 23%.
Now that's pessimism.
My hunch is that, at whatever turns out to be the final low of whatever decline we're in the midst of now, the HSNSI will be lower than where it is today. Click here to learn more about the Hulbert Financial Digest
/quotes/zigman/627449/delayed Add DJIA to portfolio DJIA Dow Jones Industrial Average 10,876.49 -114.09 -1.04% Volume: 211.30M Aug. 19, 2011 2:20p var embeddedchart70394702Chart = new EmbeddedChart('#embeddedchart70394702', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:DJIA'); jQuery.data($('#embeddedchart70394702').get(0), 'embeddedchart', embeddedchart70394702Chart); //$(document).ready(function() { var storywidth = $('#mainstory').width(); var maxwidth = storywidth; $('#maincontent pre').each(function (index, value) { var thiswidth = $(value).width(); if (thiswidth > maxwidth) maxwidth = thiswidth; }); var offset = maxwidth - storywidth; if (offset > 0) { var margin = 13; var blanketwidth = $('#blanket').width(); var contentwidth = $('#maincontent').width(); $('#blanket').width(blanketwidth + offset + margin); $('#maincontent').width(contentwidth + offset + margin); $('#mainstory').width(storywidth + offset + margin); } //});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.
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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. Collapse
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