Interesting Read: Still No Exuberance
CBSMarketwatch reports: Is the market still tired? Or will Tuesday's rout be enough to re-energize the market into mounting a fresh assault on new highs?
For insight, I turn to the investment newsletters. Taking a contrarian perspective, I am eager to see where we stand on the spectrum that ranges from excessive optimism (which would be very bearish) to excessive pessimism (which would be bullish).
Interestingly, I don't see much evidence of the exuberance and enthusiasm that is typically seen at major tops.
Consider the latest readings of 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 Tuesday night, the HSNSI stood at 44.5%.
To put that in context, the historical range for the HSNSI extends from 79.7% on the high side to minus 81.8% on the low end. (Negative values mean that the average short-term market timer is net short the market.)
So while the editor of the average market timing newsletter is closer to the optimism end of the spectrum than the pessimism end, he is still a long way away from that extreme of optimism - some 35 percentage points, in fact.
This in itself is an encouraging sign. But even more encouraging is where the HSNSI stands relative to where we would normally expect it to be, given the strength in the market in recent months.
Imagine where we would have forecast the HSNSI to stand today if, at the beginning of the year, we were told that the Dow would close above 14,000 in late July. The Dow at the time was trading at 12,463, and the HSNSI stood at 65.3%. I don't know about you, but I would have guessed that the HSNSI would also be higher - perhaps at or above its previous all-time high of 79.7%.
Yet, far from rising in the wake of the market's impressive strength, the HSNSI has dropped markedly.
Another comparison that is bullish: In late February, the day before the so-called Shanghai Surprise that shed 416 points off the Dow, the HSNSI stood at 62.4%. The editor of the average market timing newsletter is a lot more subdued today, and yet the market relatively quickly recovered from that correction.
A number of you have written in recent weeks to press about how much confidence one should place in contrarian analysis in general, and the HSNSI in particular. So let me say a few things that I think you should keep in mind:
Our econometric analysis of the sentiment data over the last two decades shows that it does a credible job of forecasting relative probabilities of market rallies and declines. In some econometric tests that we've run, sentiment variables such as the HSNSI are able to explain as much as a third of the market's subsequent three-month returns. (For the statisticians among you: the r-squared in some regressions is as high as 0.33.)
There never will be a time when all indicators point in the same direction. If your adviser ever says that the evidence all points in the same direction, you should run - not walk - the other way.
Notice also that contrarian analysis is at best a shorter-term tool. To the extent it can tell you anything, it is primarily about how the market will perform over the next couple of months. It won't help you guess where the stock market will be when you retire several decades from now.
The bottom line? Anything can happen. But, from the perspective of a contrarian analysis of sentiment among investment newsletters, odds favor that the market will soon recover from Tuesday's decline and will trade at new all-time highs sometime in the next three months.
Full story: marketwatch.com |
