Too Many Bulls?

05/27/2011 1:01 pm EST


Mark Hulbert

Senior Columnist, MarketWatch

Recent data suggests that too many investment newsletter writers are bullish, which is often a short-term negative for the stock market. Mark Hulbert, the editor of Hulbert Financial Digest, explains further in this exclusive interview with

Mark, you are very well known for tracking investment newsletter advisors. Can you tell us a little bit about what they’re saying right now, and what that says for the direction of the market?

I think that they’ve become a little bit too bullish in recent weeks. It’s understandable that they would. It’s a very human reaction, but nonetheless, my research suggests that when there’s too much bullishness, the market goes into a particularly risky period.

That doesn’t mean the market has to go down, but it means that risk is relatively high right now given the amount of bullishness among the timers that we track.

Why is it that they’re getting bullish? Are they getting bullish about certain market segments?

Well, the nice thing about my job is I don’t have to look at all the reasons that they give. I just simply look at their exposures to the market.

What I do every day is track their exposure, and I average that across all of the newsletters that we track. We track nearly 200 of them.

Not all of them recommend a particular exposure level, but many of them do. Among those that do, we simply update, of course, as we track their portfolios and look at what their average exposure levels are.

So, you’re quite right. It could be for a myriad of different reasons why they’re bullish, but nonetheless, the fact that they’re bullish is what I put into my database. My research—and I’ve been doing this now for nearly 30 years—shows that when you have excessively high levels of bullishness, it’s usually a sign of market turbulence, if not actual decline.

The newsletter writers that you track are not necessarily all focused on buying stocks. Some of them are short of the market or some of them are actually very negative, if possible.

Well, that’s right. Indeed, if somebody is short the market, then we put them in—let’s say 50% of their portfolio, 50% of their equity portfolio is short—I’ll put that into my average as negative-50.

So, we do take into account those that want to short the market. That’s very much a relevant data point for my sentiment analysis.

I would think that many investors who are out there subscribing to newsletters also want to know. They don’t want the newsletter writer to necessarily go in the direction of the market, but to know ahead of time that perhaps things are not as good as they seem.

Well, that’s right. I think the sentiment data is an overlay that you can use to interpret whatever advice or advisor that you are otherwise following.

I need to qualify sentiment. It’s a very short term...relatively short-term indicator.

It turned out that no research that I know of would indicate that sentiment is a long-term market indicator. It’s not going to tell you where the market is five or ten years from now. It tends to be more in the space of a couple months.

Given that, it’s a bit alarming. In fact, in recent weeks, especially in the Nasdaq-oriented part of the market, the timers have been as bullish as they have been in years.

Are there a particular set of newsletters that you would recommend, or not, that you think right now are sort of correctly gauging the direction of the market?

Well, there are always some timers that have a good track record. I don’t recommend per se. But, yes, if one were trying to use my database as a basis for choosing, I would definitely recommend looking at recent performance as well as long-term performance. It’s an interesting mix.

Generally long-term performance is far more indicative of the future than short-term performance, but there are momentum factors in the market. So if you were to marry a focus on advisors that have good long-term records as well as those, of that subgroup, that are actually doing well right now, it’s not a bad group to focus on.

Are there certain areas of the market that you particularly think investors should be looking at right now, just based on what you’re covering?

Well, you know, gold is very interesting right now. I mean, the same general pattern that I talk about in the stock market was also true in the gold market.

In fact, the average exposure to the gold market among the gold timers we track actually became even more optimistic than it was in the stock market, and it was already pretty optimistic in the stock market.

In fact, gold, I think, was the highest exposure level we’d seen in, I think, five or six years. I have to go back and look at the exact data, but it was in years. This was right before that huge drop in gold that occurred in late April and early May, and it was even greater, of course, in silver.

What’s interesting is how quickly the gold timers ran for the exits. If they had—it turns out they didn’t—but had they stubbornly held onto their bullishness in the face of that drop, it would have been a very bad sign. Fortunately for the precious metals complex, they in large part ran for the exits.

They’re now almost completely out of the precious metals market. That suggests that they’re rebuilding that wall of worry that would allow the market to eventually resume its climb.

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