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Apocalypse postponed?
Commentary: Best timers remain more bullish than the worst timers
By Mark Hulbert, MarketWatch
Last update: 3:08 p.m. EST Jan. 23, 2008

The U.S. stock market looked over the edge of the cliff on Tuesday and decided not to jump off - thanks to Ben Bernanke and his crisis team of psychologists at the Federal Reserve.

So, what's next?
Did Tuesday morning's low at 11,634.92 on the Dow Jones Industrial Average represent the capitulation low of the correction that began last fall? Or will investors, upon further consideration of what must be so awful in the financial world as to require an emergency Fed rate cut just days before a regularly-scheduled one, decide that happy days are probably not here after all?
For guidance, I decided to turn, as I have on several prior occasions, to the 10 newsletters with the best risk-adjusted market timing performances over the past 10 years. To be sure, you might wonder why I would even bother, since the best timers have, on balance, been wrong over the last three months, clinging to a bullish posture even while the great majority of newsletters were turning more bearish. See Nov. 15 column
But the past three months constitute the exception rather than the rule. If the past is prologue, the best performers are more likely to be right about the market's direction than the worst performers. But no system is perfect; long-term success requires a disciplined adherence to systems that work. So I advise against dumping a system with good long-term success because of a single misstep.
With that thought in mind, here is a synopsis of what the top timers currently are saying, listed in alphabetical order. (I have eliminated from the following list one of the ten top performers because it is a purely mechanical model based on the calendar. Its good performance notwithstanding, its current posture tells us little about the market's term prospects.)

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Blue Chip Investor: Very bullish. Editor Steven Check's equity valuation model is based on the stock market's earnings yield relative to the yield on corporate bonds; that model now classifies stocks to be more undervalued than at any time in the 28-year history Check has for this model. In fact, according to Check's calculations, if corporate earnings neither grow nor contract, and interest rates simply stay where they are currently, then the stock market would have to appreciate 37% just to b ring his equity valuation model back to the midpoint of its historical range. Check's model portfolio currently is 89% invested.
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Bob Brinker's Marketimer: Bullish. In his most recent issue, published in early January, editor Bob Brinker wrote that "the risk of a cyclical bear market decline in excess of 20% is not likely to materialize any time soon ... We expect the S&P 500 index to achieve new record highs this year and to reach the 1600's range in the process." Brinker's model portfolios are fully invested.
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Chartist and Chartist Mutual Fund Timer. Bearish. Editor Dan Sullivan turned bearish last week, and moved his model portfolios to a 100% cash position. See Jan. 18 column
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Investors Guide to Closed-End Funds: Moderately bullish. Editor Thomas Herzfeld's "U.S. Equity Funds" model portfolio is around 49% invested.
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Medical Technology Stock Letter: Difficult to classify. It may seem odd to include in this list a newsletter that is oriented more toward the medical technology and biotech sectors than to the overall market. But this letter, edited by John McCamant, deserves to be included for the simple reason that a hypothetical portfolio that was divided between the stock market and cash according to his recommended exposure level is in the top 10 for risk-adjusted timing-only performance over the last decade. McCamant's model portfolio currently is 92% invested, while his "Trader's" portfolio is aggressively bullish at 147% invested (i.e. 47% on margin). This averages out to a recommended exposure level of 119%, even though McCamant says that he believes that the negative "overall tone of the stock market... will continue for the foreseeable future."
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No Load Fund Investor: Neutral. Editor Mark Salzinger writes that he believes "2008 will be a difficult year for the equity markets. Declining growth and moderately rising inflation in the U.S. will keep a lid on the gains of most stocks, though the large-cap and mid-cap "growth" areas of the U.S. and international markets should hold up better than the rest." Salzinger is currently allocating 70% of his "Wealth Builder" portfolio (his most aggressive) to U.S. equities.
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Timer Digest: Bearish. Editor Jim Schmidt bases this newsletter's market timing model on a consensus of the top market timers. His consensus of the top 10n based on performance over the past 52 weeks is bearish, with 2 bulls and 8 bears. His consensus of the top ten for performance over the last two years is bullish, with 5 bulls, 3 bears, and 2 neutral. His composite timing indicator based on these two consensus readings, known as the "5 & 10 Consensus," went bearish last Saturday. The newsletter's model portfolios currently are fully invested in stocks or mutual funds.
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Vantage Point: Moderately bullish. One of the two indicators on which editor John Harris had been basing his bullish posture turned bearish last week. As a result he reduced his recommended equity exposure from 100% to 75%.

Where does this summary leave us? Three of these nine top timers are bearish, and the bullishness of two more of them is less than it was a couple of months ago. The average equity allocation among all nine is 69%. In contrast, the last time I conducted a survey of the top timers, last November, their average equity allocation stood at 83%. And none of the top timers was then bearish.
So there has been a significant deterioration in the bullishness of the average top timer.
Not all hope is lost for the bulls, however. Consider the recommended equity allocations among the 10n market timing records with the very worst records over the last decade. On average they currently are recommending a 13% exposure to the short side of the market. So even though the best timers aren't as bullish as they were a couple of months ago, they remain significantly more optimistic than the worst timers.
The bottom line is a muted bullishness. And this dovetails nicely with the message that emerges from a contrarian analysis of all newsletters, as opposed to just the top and bottom performers. That message has become less bullish as well in recent weeks. Read full story End of Story
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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