Monday, October 26, 2009

Contraian Analysis Suggests Market Goes Higher

After the last week or so in the market and todays 1% drubbing, its difficult to remain overly bullish. Just about everybody claims the market is ready for a sizeable pullback and the drops in the SP500 in 5 of the last 7 days seems to bolster those thoughts.

According to the recent report from Mark Hulbert, the evidence suggests that the market remains too bearish for a big correction. Hulbert has long been a tracker of the sentiment in the financial newsletter circuit. When this group gets too bearish, the market typically rallies as it did in Mar/April until. After such a long rally the market tends to get too bullish and hence a correction happens. Oddly and maybe not really that oddly, the average newsletter is more bearish now then it was in April. Everybody continues to expect the correction that won't happen as long as everybody expects it. After big recessions and bearish markets there has been a tendency towards long rallies without a 10% correction.

Based on the Leading Economic Indicator report we wrote last night, its difficult to grasp why these so call financial experts are so bearish. All indicators suggest a good economic recovery. It looks like the 'Wall of Worry' will once again be climbed. When these guys turn bullish, watch out. Until then, keep buying the dips!

  • On April 13, the average recommended equity exposure was 34.6% among a subset of short-term market timing services tracked by the Hulbert Financial Digest. The Dow that day closed at 8,058.
  • Monday (10/19), in contrast, the Dow closed at 10,092, more than 2,000 points higher. And, yet, the average recommended equity exposure among this same subset of short-term investment newsletters is today just 32.3% -- 2.3 percentage points lower than where it stood six months ago.
  • Or consider where this average recommended equity exposure was at the end of August, when the Dow was trading below 9,500: It stood then at 46.3%. In other words, the last six hundred Dow points have led to a net decrease in average equity exposure of 14 percentage points.

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