[The bearishness on this thread is huge. But it may not reflect a majority investor opinion. See below.]
Stubborn bullishness a danger sign
Paradoxically, adviser optimism grew amid Monday dive
By Mark Hulbert, CBS.MarketWatch.com
Last Update: 12:26 AM ET Oct. 2, 2002
ANNANDALE, Va. (CBS.MW) -- On Monday, when the Dow dropped to a new four-year low, the average
investment adviser actually became more bullish.
No other single fact better illustrates why contrarians are worried and why they doubt that we have seen the final
lows of this bear market. On almost all previous occasions in which bear markets truly bottomed, advisers, on
average, were incredibly pessimistic. They were overcome with despair, having given up hope that there would
ever be another bull market.
The last thing on their minds was turning more bullish. Yet that is what the
average adviser did Monday.
So while Tuesday's market action was definitely encouraging (see Market
Snapshot), with the Dow's 347-point surge (INDU: news, chart, profile)
putting some breathing room between its current level and Monday's low,
contrarians suspect we're in a bear-market rally rather than the beginning
stages of a long-term bull market.
One measure of advisory sentiment comes from the Hulbert Stock Sentiment Index (HSSI).
The HSSI measures the average exposure to the equity markets among the more than 160 investment advisory
newsletters tracked by the Hulbert Financial Digest. To ensure that this index reflects the latest forecasts of the
various newsletter editors, the HSSI focuses only on those newsletters that communicate their thoughts
electronically with their subscribers.
The HSSI further narrows the list of newsletters by focusing on just those that, when they switch from being
bullish to bearish or vice-versa, alter their equity exposure by a large amount. This eliminates newsletters whose
presence would tend to reduce the index's volatility.
The HSSI currently stands at 15.5 percent, well above its all-time low: negative 81.8 percent. Furthermore, the
HSSI's current reading is more than 30 percentage points higher than at the market's July lows.
So by no means can it be said that advisers currently are as bearish as they are likely to be at the final bottom of
this bear market.
Michael Burke, editor of Investors Intelligence and a student of advisory sentiment for nearly 50 years, recently
provided a historical perspective on advisory sentiment at bear-market bottoms.
Take the 1973-74 bear market. By the time the stock market finally bottomed in late 1974, according to Burke, it
had become commonplace that there were more bears than bulls. In fact, by Burke's tally, there were more bears
than bulls during 42 of the first 44 weeks of 1974.
Current bearishness hardly even registers on the same scale. Over the last four years (or 200-plus weeks),
according to Burke, there have been only seven weeks in which there were more bears than bulls. And even
during these seven weeks of relative bearishness, there still were only narrowly more bears than bulls. During
much of 1974, in contrast, there were twice as many bears as bulls.
For these and other reasons, Burke does not believe we will see the final low to this bear market until sometime
in 2003.
In addition to calculating the HSSI, the Hulbert Financial Digest also computes sentiment indexes for the Nasdaq,
gold and bond markets.
For more information on how to subscribe to daily or weekly e-mail updates of any or all of these four sentiment
indices, contact mailto:john@hulbertdigest.com.
For more information or to subscribe to the Hulbert Financial Digest, click here.
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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