Market’s long-awaited correction at hand - Mark Hulbert - MarketWatch

Market’s long-awaited correction at hand - Mark Hulbert 
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March 23, 2012, 1
Market’s long-awaited correction at hand
Commentary: There is too much bullishness and complacency


By Mark Hulbert, MarketWatch


CHAPEL HILL, N.C. (MarketWatch) — The stock market’s long-awaited correction appears to have begun.

I say this because the market’s successful assault on Dow 13,000 brought a number of eager bulls out of the woodwork — so much so, in fact, that even though the Dow Jones Industrial Average DJIA +0.27% has now fallen back to just above that 13,000 level, there is a lot more bullish sentiment than existed just two weeks ago.

That’s worrisome from a contrarian point of view.

Consider the average recommended stock market among a subset of short-term stock market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Stock Newsletter Sentiment Index, or HSNSI). After the Dow’s initial failure in late February and early March to burst through the 13,000 level, this average dropped by March 9 to as low as 17.6% — which meant that the average market timer was keeping more than 80% of his equity portfolio out of the market.

Today, even though the Dow is less than 1% higher than where it stood then, the HSNSI stands at 42.1%. So a tiny net increase in the market has led the average market timer to increase his or her equity exposure by 25 percentage points.

That’s not reminiscent of the veritable Wall of Worry that bull markets like to climb.

Some other sentiment indices are painting a similar picture.

Consider an innovative sentiment indicator constructed by David Aronson, an adjunct finance professor at Baruch College in New York and president of Hood River Research, a firm that employs sophisticated econometric techniques to “enhance the profitability of quantitative investing strategies.” What Aronson does is compare the VIX’s VIX -4.82% level to where we would otherwise expect it to be trading, given the stock market’s recent action.

Aronson calls the result of his calculation the “Purified VIX.” Beginning last week, he says, this “Purified VIX” reached levels indicating there is excessive complacency and optimism.

Is the message of these sentiment readings inconsistent with the intermediate-term bullishness that I reported a week ago from Sam Eisenstadt? ( Read my March 16 column on Eisenstadt’s bullish six-month forecast. )

Not necessarily. Contrarian analysis has its greatest explanatory power over the very short term of the next month or two at most.

So it’s entirely possible that the stock market will be higher than today by the fall. But if the contrarians are right, the path the market pursues to get there will take it lower first.


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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