Hot hands are bullish
By Mark Hulbert, CBS.MarketWatch.com
Last Update: 12:01 AM ET March 1, 2004
ANNANDALE, Va. (CBS.MW) - I've got some good news, for a change.
From a select group of five top-performing market timers, three currently are fully invested, and two are partially invested. Their average equity exposure is 84 percent.
Before discussing their specific market forecasts, let me review how I selected them.
The first criterion I used takes advantage of the fast-approaching one-year anniversary of the market low that was recorded just prior to the beginning of the Iraqi war. I selected those newsletters that have had a significantly higher equity exposure in the period since then than over the 12 months prior.
In other words, which market timers correctly anticipated that the last 12 months would be a lot more bullish than the previous 12?
The second criterion focused on the stock market's top in March 2000: Of the timers that satisfied my first criterion, how many had a significantly lower exposure over the 12 months following that market top than over the 12 months prior?
Not surprisingly, not very many newsletters satisfied both these criteria. But I didn't stop there.
My third and final criterion was that a timer needed to have beaten the market over the last five years on a risk-adjusted basis.
The five newsletters that satisfied all three criteria are listed alphabetically in the accompanying table, along with their recommended equity exposures as of the end of February.
Newsletter Recommended Equity Exposure at the end of February
All Star Fund Trader 100%
Bob Brinker's Marketimer 100%
Dennis Slothower's On The Money 29%
Investor's Guide to Closed-End Funds 42%
Medical Technology Stock Letter 151%
Here's what each of these timers currently is saying about the stock market.
All Star Fund Trader
Editor Ron Rowland recently turned to the Peter Sellers movie "Being There" to describe his market outlook: "We're still in a bull market, and to paraphrase Peter Sellers... 'we like to watch.'"
And Rowland has been watching since last May, when he moved from the 0 percent position he had maintained for most of the previous year. He moved first to a 50 percent invested position, and in June became fully invested.
To be sure, there are no guarantees that Rowland will remain fully invested during March, or the rest of the year, for that matter. He notes that the major market averages largely remain in a sideways trading pattern, and that "the market has some work to do before it can break out" of that pattern.
On the other side of the coin, however, Rowland thinks it is positive that the market was able to find support in late February, thus ending what to some had looked like the beginning of a much bigger correction.
For now, Rowland remains fully invested.
Bob Brinker's Marketimer
Of the five timers that made my list, Brinker's market-timing calls probably came closest to catching the precise tops and bottoms. His buy signal a year ago came on March 12, just a day after the March 11 close of the Dow Jones Industrials Average ($INDU: news, chart, profile) at 7524, which was its low for 2003.
And his previous sell signal came on Jan. 10, 2000, only slightly more than two months prior to the market's high that occurred in mid-March.
Before proceeding to discuss what Brinker is now saying, I need to say a few words to the several thousand of you who e-mailed me the last time I said something nice about Brinker.
Yes, I know all about Brinker's October 2000 forecast of a bear market rally and his disastrous recommendation to purchase the Nasdaq 100 Trust (QQQ: news, chart, profile), which at that time was trading around $80.
But for the several years that Brinker stood behind this recommendation, he consistently chose not to make this trade a formal part of his model portfolios. Note carefully that this wasn't an after-the-fact decision on his part, but made before he knew whether the trade would be profitable.
Because the Hulbert Financial Digest takes a rigorously empirical approach to performance monitoring, his HFD ratings -- which are based on his model portfolios -- did not suffer from this QQQ trade.
If you disagree with how the HFD dealt with Brinker's advice, simply ignore this section of my column -- and leave my long suffering e-mail inbox alone.
Brinker remains on his March 12, 2003, buy signal. He regards "the risk of a recession this year as essentially zero," because of which "corporate earnings prospects remain excellent."
Brinker acknowledges, however, that bullish sentiment among investors is very high right now. He therefore suggests "that subscribers... avoid chasing stock market rallies when adding new monies to equity positions... We believe the best strategy for those seeking to add to equity holdings is to take a dollar-cost-average approach."
Dennis Slothower's On The Money
Slothower is least bullish of my group of five timers.
Among the several factors that concern Slothower, one is recent weakness in the Nasdaq Composite index ($COMPQ: news, chart, profile). "When the Nasdaq trails [the rest of the market] or leads downward, the trend is normally bearish and portends a down market."
Slothower is also concerned that sentiment is too bullish: "Now that everyone in the marketplace has been willing to take on risk, it is evident that risk is high and it is time to wait on the sidelines."
Lest you believe that Slothower has turned into a perma-bear, he stresses that the correction he thinks the market is in right now "will establish a base of promising returns for the remainder of the year."
Investors Guide to Closed-End Funds
Editor Thomas Herzfeld gave the rationale in the January issue of his newsletter for why he is not fully invested: "After a strong year..., we are a little nervous going forward. Concerns of a terrorist threat overhang the market. Frankly, we are challenged about whether to position our accounts for a major disaster, which of course, we hope will never occur. But if it were to happen, we would no doubt want to have ready cash to buy into a sell off."
Medical Technology Stock Letter
The appearance of this newsletter in my gang of five might surprise you, since editor John McCamant focuses primarily on the biotech and medical technology sectors.
But it also is true that you would have beaten the market over the past five years by buying and selling an S&P 500 index fund using the recommended equity exposures in his model portfolios of medical technology stocks.
And, just as already mentioned in the case of Brinker's newsletter, the Hulbert Financial Digest takes a rigorously empirical approach to determining which newsletters satisfy various performance criteria.
McCamant is bullish. He views recent market weakness "as part of a healthy correction. We are reassured by some of the earnings that have been reported, which have easily exceeded estimates, and the continued signs of strong economic growth... The results for the first quarter will be helped by comparisons with a weak first quarter last year. The combination of monetary and fiscal stimulus gives the economy a powerful tailwind. With this positive environment, it continues to be a time to add to attractive stocks on their periodic dips."
New feature: Hulbert Interactive
A brand new CBS MarketWatch feature lets you research stocks and mutual funds using the same in-depth data we use: The Hulbert Financial Digest database. After 20 years of compiling this data, we're excited to now be able to share it with you. Hulbert Interactive
Editor's note: The most recent edition of the Hulbert Financial Digest is now available by e-mail or regular mail. Highlights this month include:
* Too many people jumping on the same stock? Maybe they know something you don't.
* Most- and least-popular stocks and funds
* Profiles of Value Line Investment Survey, The Chartist, Investment Quality Trends, and MPT Review
For more 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. |
