May 28, 2004
>11,000=50 (via Robert Schwartz):
At Least the Contrarians Are Smiling (MARK HULBERT, May 23, 2004, NY Times)
To be sure, contrarian analysis strikes some investors as odd, even mysterious. But it rests on nothing more contentious than the widespread tendency of most people to become more bullish and optimistic as the market climbs and to be progressively more bearish as it falls. It follows that the most extreme levels of bullishness will be registered at market tops, and that the most gloom and doom will be found at market bottoms.Contrarians often focus on newsletter editors because the editors' consensus opinion of the market is a very sensitive barometer of investor moods. The editors can be quick to change their minds about the market - raising or lowering by big margins their recommended portfolio exposure to stocks. In contrast, large Wall Street institutions are relatively sluggish in changing their recommended market exposure. And when they do so, they typically suggest only small adjustments.
The three dozen newsletters monitored by The Hulbert Financial Digest that try to time the market's short-term swings have turned remarkably bearish in recent months. They now have a recommended equity exposure, on average, of minus 13.5 percent. That means that the average market timer in this group is not only recommending that subscribers avoid stocks, but that they allocate about one-eighth of their portfolios to going short the stock market - a bet that the market will decline.
That would be reason enough to expect a market rally, according to contrarians. But they also point to a second reason: the speed of the market timers' turn from stocks. Typically, that doesn't happen at market tops. As recently as Jan. 8, the average equity exposure among this group of timers was as high as 47.5 percent, according to The Hulbert Financial Digest. That means that, even though the Standard & Poor's 500-stock index is only about 3 percent lower now than it was then, this group has reduced its average equity exposure by more than 61 percentage points.
This would seem to jibe with polling numbers that show people are still worried about the economy despite its return to solid growth and outstanding long-term prospects globally. Posted by Orrin Judd at May 28, 2004 4:02 PM
Market timing is just a slow and excruciatingly painful form of suicide.
Posted by: David Cohen at May 28, 2004 4:15 PMThey should switch to gambling at Vegas. Still circling the drain but the entertainment is better.
Posted by: Gideon at May 29, 2004 2:34 AMA better measure of sentiment would be the Volatility Index (VIX). It measures the premiums paid on options contracts, and thus the expectations of future volatility of market participants. Low readings indicate optimism. The VIX hits bottoms when the market indices hit tops, and vice-versa. Right now the VIX is at 15.82, which is near a multi-year low, lower than at the peak of the 2000 bubble. Sentiment is still rabidly bullish.
Posted by: Robert Duquette at May 29, 2004 3:27 PMI don't pay any attention to market indexes, but I am aware that the DJIndustrials have note moved in 6 months, whatever that means.
One thing it might mean is that 6 months from now the DJI won't be 11,000.
Posted by: Harry Eagar at May 29, 2004 4:15 PMThe current vix trend is fully in line with the longer term trend. Short term investor sentiment may be helpful in locating a trading bottom. Global growth is bullish not bearish. While the DJIA has consolidated over the past few months, the move off the March '03 lows has been dramatic and such a consolidation could be seen as healthy.
Market technicals are OK at this point and a move higher in the indecies may be rather pronounced, barring some unforseen event. Geopolitics, the war , the FED and the election are supplying the "wall of worry" markets need for further advances. Corporate earnings are rising fast and interest rates are low. The speculative frenzy of late '90's Wall Street will not return for a generation but quiet, sound investing will probably work out just fine. BTW, financial newsletter writers, in general, are spectacularly wrong.
Posted by: Tom Corcoran at May 30, 2004 4:50 PM