Market Hulbert's Latest HSNSI

[HenryTo]

Advisers aren't impressed

By Mark Hulbert, MarketWatch
Last Update: 12:56 AM ET April 8, 2005


ANNANDALE, Va. (MarketWatch) -- The stock market made it four for four on Thursday, having risen every day this week.

But investment newsletter editors aren't impressed. On balance, in fact, they are slightly more bearish today than they were when the week began.

This is a positive sign, according to contrarian analysts, since the newsletters' response to the rally is more typical of what is seen in bull markets than in bear markets. If the market were poised to head much lower right away, contrarians argue, then we would expect advisers to be eagerly declaring that the worst is over and that any rally is proof positive that happy days are here again.

That's not what we're seeing at all.

Consider the latest readings from the Hulbert Stock Newsletter Sentiment Index (HSNSI), which reflects the average stock market exposure among a group of short-term market timing newsletters. As of Thursday night's close, the HSNSI stood at minus 4.1 percent, which means that, on average, these market timing newsletters are net short the stock market.

Before the week began, in contrast, the HSNSI stood at minus 1.0 percent.

To be sure, the HSNSI's decline this week of 3.1 percentage points may not seem all that momentous. And, in and of itself, it isn't. What gives the decline meaning is that we normally would expect the HSNSI to rise as the market rallies. So any decline at all has significance.

So, at least from the point of view of contrarian analysis, the preconditions continue to be built for a sizeable rally.

The meaning of "four in a row"

On a related subject, I want to respond to those who apparently believe that the market's odds of rising on Friday are higher because it has risen for four days in a row. Though none of those who have suggested that this is the case have provided the reason why it should be so, the idea seems to be that the market has worked up a head of steam which should keep it rallying for a while longer.

To test whether there is any basis for this notion, I examined all instances over the last century in which the Dow Jones Industrials Average ($INDU: news, chart, profile) rose for four days in a row. Following 52.3 percent of these instances did the Dow rise on the fifth day.

Though this is slightly above the 50-50 odds of a coin flip, that is not the proper comparison. Instead, the right question to ask is whether this 52.3 percent frequency is any different than the proportion of all trading sessions in which the market rises.

It isn't.

Over the last century, the market has risen on 52.4 percent of the trading days. That is statistically no different than the proportion of rising days following four days in a row of gains.

So whether the market rises on Friday has nothing to do with its otherwise impressive run of gains this week.


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.

[HenryTo]

Latest HSNSI readings suggest the market is getting overbought pretty quickly:
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Contrarian caution

By Mark Hulbert, MarketWatch
Last Update: 12:01 AM ET May 24, 2005

ANNANDALE, Va. (MarketWatch) -- What will the stock market do for an encore?

The stock market over the past month or so has been adhering quite closely to a contrarian script, rallying impressively in the face of significant pessimism. (Read archived column.)

As of Monday night's close, the (SPX: news, chart, profile) S&P 500 and the (COMP: news, chart, profile) Nasdaq Composite index had climbed back to two-month highs.

What does the sentiment picture say is likely to happen from here?

I wish I could be as upbeat today as I was in late April. But I can't. The latest data from the Hulbert Financial Digest paint a significantly less bullish picture than a month ago.

Consider the Hulbert Stock Newsletter Sentiment Index (HSNSI), which measures the average stock market exposure among a subset of short-term market timers. As of Monday's close, the HSNSI stands at 21.8 percent.

To be sure, since this is far below the index's all-time high of 79.7 percent, the current reading is no where close to being so high as to trigger a contrarian-based sell signal. So at least to this extent, today's sentiment picture can still be interpreted bullishly.

At a minimum, however, there are several storm clouds on the horizon. And it behooves us to pay them close attention.

Consider first how the current reading contrasts with that of a month ago. On April 20, for example, the HSNSI stood at negative 28.3 percent. That means that the average short-term market timer has increased his exposure to the stock market by more than 50 percentage points in just over a month's time. Contrarians would be more confident in the sustainability of the market's rally if advisers had not been so quick to jump on the bullish bandwagon.

Another storm cloud emerges when we focus on the contrast between the HSNSI's current level and where it stood the last time the stock market was trading at current levels.

On April 12, when the ($INDU: news, chart, profile) Dow Jones Industrials Average closed at 10,508, only slightly below the 10,524 level at which it closed Monday, the HSNSI stood at negative 1.6 percent.

That is some 23 percentage points lower than where it is today. This contrast is not an encouraging sign, since it suggests that the average adviser considers the Dow Industrials at the 10,500 level to be less of a cause for concern today than six weeks ago.

A third - and related - storm cloud emerges when we contrast the stock market's current level with where it stood on March 15 - the last time the HSNSI was at, more or less, today's level. It turns out that the Dow Industrials on that day closed at 10,745 -- more than 200 points higher than where it closed on Monday.

This is a good measure of how much more bullish the average adviser has become.

Contrarians no doubt would differ over whether these brewing storm clouds are sufficient reasons in and of themselves to reduce equity exposures.

But they undoubtedly would all agree that it will be very crucial to see how advisers react to the stock market's next correction. If they are quick to jump back on the bearish bandwagon, then the rally's sentiment foundation will once again become strong.

But if they are hesitant to reduce exposure in the face of that correction, then the contrarian forecast will be for a return of bad weather.

[HenryTo]

Argues that the HSNSI (together with last week's reading) is now the lowest since the bear market began in March 2000 - says that most of the decline is already over.
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Another brick in the wall of worry

By Mark Hulbert, MarketWatch
Last Update: 12:01 AM ET April 28, 2005


ANNANDALE, Va. (MarketWatch) -- The contrarian case for a stock market rally continues to strengthen.

While the market has been thrashing around in recent sessions within a fairly narrow trading range, the mood among investment newsletters has grown more and more discouraged. This response is more typically seen nearer bottoms than tops.

Consider the latest readings from the Hulbert Stock Newsletter Sentiment Index (HSNSI), which reflects the average stock market exposure among a subset of short-term market timing newsletters tracked by the Hulbert Financial Digest. As of Wednesday night's close, the HSNSI stood at negative 24.4%. (The negative reading means that the average short-term market timer is short the stock market.)

There has been only one other period since the bear market began in March 2000 in which the HSNSI was any lower. And that was last week, when it dipped to negative 30.6%.

To put the HSNSI's current reading into perspective, consider that this sentiment index only got to as low as negative 20.0% during the weeks prior to the stock market's low in March 2003, when the Dow Jones Industrials Average ($INDU: news, chart, profile) was trading below 8,000.

And during the summer and fall of 2002, when the DJIA dropped to what at least so far has been the bear market low at 7,286, the HSNSI never got below negative 15.1%.

In other words, even though the DJIA is currently between two and three thousand points higher than where it was at those earlier lows, the average short-term market timing newsletter is significantly more bearish.

From the point of view of contrarian analysis, this is an encouraging sign.

If the market's high in early March represented the peak for this cycle, and if newsletter sentiment adhered to the typical pattern, we'd be seeing something entirely different right now. Instead of becoming more bearish and despairing in the wake of the correction, the typical market timing newsletter would be treating it as a buying opportunity -- and therefore would be increasing his market exposure.

Because HSNSI's message is so stark in this regard, I checked to see if other sentiment measures were painting a similar picture. I first looked at the survey conducted by the American Association of Individual Investors, in which members who visit the group's web site are asked to indicate whether they are bullish, bearish, or expecting a correction.

In recent weeks there have been significantly more bearish respondents than bullish ones. For the week ending March 31, for example, 51.0% indicated that they were bearish while only 28.4% indicated that they were bullish. Though the bearish percentage has dropped back a bit since then, this 51.0% represents one of the highest readings AAII has ever recorded.

Of the 926 weekly readings the group has compiled since the summer of 1987, in fact, only 20 have been higher than the one recorded on March 31. In other words, recent bearishness was more extreme than 97.7% of all weeks over the last 18 years.

Which weeks were those 20 with even more extreme bearishness? Three-quarters of them (15, to be exact) occurred in late 1990 and early 1991, during the market's severe correction prior to the first Gulf War. Two more came right before the bull market took off in March 2003. Another came at the market low in October 2002, and yet another at the market low in July 2002.

Soon after each of these occasions, of course, the stock market staged a powerful rally.

Only one of these 20 readings did not coincide with a market low: October 16, 1992. But even in this case, it should be pointed out that the market's subsequent performance was quite bullish.

The other sentiment measure I checked was the Advisory Sentiment index as compiled by Investors Intelligence. The picture painted by this index is somewhat at odds with those painted by the HSNSI and the AAII survey. But even so, Investors Intelligence's editor Michael Burke is placing a moderately optimistic spin on the data.

In the latest reading, which was released Wednesday morning, Investors Intelligence reported that 44.0% of newsletters they monitor are bullish and 29.7% bearish. Because the average bearish percentage in rising markets is 35%, Burke suspects there may still be too much optimism among investment advisors.

That normally wouldn't be considered bullish.

At the same time, however, the trend of the Investors Intelligence data is encouraging. At the end of 2004, for example, there were 62.9% bulls and just 19.6% bears. So over the first four months of this year there has been a significant retreat of the bulls and a big increase in bearishness.

For these and other reasons, Burke yesterday morning concluded his interpretation of the sentiment data by saying, "it is likely most of the selling has taken place."

The most recent edition of the Hulbert Financial Digest is available by e-mail or regular mail. Highlights include:

Bear facts: The best performing newsletters right now are significantly more bullish than the laggards.
Performance scoreboards, most/least popular stocks and funds, market exposure among timers
Profiles: Bob Brinker's Marketimer, Dow Theory Forecasts, The No-Load Fund Investor and OTC Insight
For information or to subscribe to the Hulbert Financial Digest, click here.


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.