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Good news: Letter editors are discouraged

By Mark Hulbert, CBS.MarketWatch.com
Last Update: 12:01 AM ET April 23, 2004

ANNANDALE, Va. (CBS.MW) - Cheer up! Over the past week, newsletter editors have become even more discouraged than they were already.

That's good news, according to contrarians, because the stock market likes to climb a wall of worry.

Consider the latest readings from the Hulbert Stock Newsletter Sentiment Index (HSNSI), which measures the average equity exposure of a subset of newsletters on the Hulbert Financial Digest's monitored list.

As of Thursday night's close, the HSNSI stood at 13.4 percent, which indicates that the average newsletter editor barely has any equity exposure at all.

So thoroughgoing is the average newsletter editor's dejection that the HSNSI did not change on Thursday, despite the Dow Jones Industrial Average's ($INDU: news, chart, profile) 1.5 percent rise and the Nasdaq Composite's ($COMPQ: news, chart, profile) increase of nearly 2 percent.

This is not what we would be seeing if we had already registered the final top of the rally that began a year and a half ago. If that were the case, and assuming that newsletter sentiment were adhering to the typical pattern, newsletter editors right now would be stubbornly bullish.

Yet, a more accurate description of their current behavior would be that they are stubbornly gloomy.

Here's another way of making the same point: Contrast the HSNSI's current level of 13.4 percent with where it stood on those other days over the last couple of months in which the stock market was more or less at current levels. This index is lower today than on those previous occasions.

For example, on Jan. 28, the Dow closed at 10,468, just seven points higher than where it closed on Thursday. Yet the HSNSI stood then at 42.9 percent, or more than three times higher than its current level.

In other words, when the average newsletter editor looked at the market in January, he concluded that the glass was half full. Today, in contrast, with the market at more or less the same level, he has concluded that it is half empty.