Fast Shifts in Sentiment

08/19/2011 12:00 pm EST


Mark Hulbert

Senior Columnist, MarketWatch

Changes in sentiment have zig-zagged furiously over the past month. In this exclusive interview with, Mark Hulbert of the Hulbert Financial Digest explains how it might have alerted investors to the recent plunge in stock prices.

It seems like investors are nervous and panicky. Can you tell me how you’re seeing the sentiment now?

One of the main things I’m viewing on the whole sentiment front is how quickly the mood is changing. It turns out that what we used to see taking place over weeks or months is now taking place in as little as a day or two. It’s very, very hard to generalize where sentiment is.

For example, it did a pretty good job of alerting people to what happened in late July and early August, when the market underwent that extraordinary plunge.

We noted to our clients throughout that period about sentiment among the advisors that we track—and we track about 200 of them at the Hulbert Financial Digest. Up until about August 10 or 11, which is after market had already gone down...golly 16% or 17%, the advisors on average were remarkably complacent about it.

They said, "Oh well, this a pause. It refreshes. Maybe take a little money off the table." What have you. But none of the throwing in the towel. That’s the hallmark of the capitulation that usually signals a tradable bottom.

It was one thing that ended up helping those who follow sentiment from a contrarian point of view.

Contrarian point of view, certainly. Now what about those that feel that we are in, say, a bear market? Not just a correction, but a bear market.

Well, contrarian analysis may help people make that determination, but I have yet to find how at least our sentiment data can—and I say by "our" the Hulbert Financial Digest sentiment. We find that it’s primarily a short-term tool.

The rationale for it makes a certain amount of sense to me, which is that regardless of what the underlying trend from a primary point of it going up or down over the next five years or ten years. Regardless of that, sentiment from a short-term point of view will make the market be a little bit ahead of itself or behind itself, relative to that underlying trend.

What I at least try to tell my clients is that contrarian analysis doesn’t tell you what the underlying trend is. It tells you are you ahead or behind what that trend is.

What other advice are you giving your clients right now?

Well, the other thing is to be absolutely rigorous about following sentiment trends, because:

  • One thing I mentioned already: sentiment is changing so quickly  that it’s hard to make a generalization that’s going to last for more than a couple days;
  • without hard data, it’s very difficult to be a contrarian.

For example, one of the popular ways that you hear people be a contrarian is they’ll look at magazine covers. Following that theme is in fact two famous examples from BusinessWeek back 30 years ago, when right at the market bottom they said "death of equities."

Right at the top they said the "rebirth of equities." They caught both perfectly.

Maybe you could do that then, when there were not that many business magazines around, but now you have hundreds—literally—from which to choose. If you want to be bullish and a contrarian, believe me, you can find a bearish headline out there. If you want to be bearish and a contrarian, you find can find a bullish headline out there.

This is just a way of saying that without hard data, contrarian analysis becomes, I’m afraid, the excuse for sloppy thinking.

And, when you say sloppy thinking, we’re getting a lot of headlines that are reminiscent of things we saw in 2008, the ones we saw in 2003...I mean the same type of feeling that the end is near.

That’s right. That’s right. Usually, I mean from an anecdotal point of view, that helps us. But then you see what we feel as though the Hulbert Financial letters can help a contrarian investor do is go beyond the anecdotal evidence to actually focus on the data.

It may seem as though things are worse off now in terms of the mood. More bearishness, more pessimism, that sort of thing. But is there really?

Let’s look at what the average advisor is telling his subscribers to do. What exposure level are they recommending?

Those are facts, rather than just my interpretation of what they’re saying. I think those facts are very, very helpful for a contrarian to be objective about it.

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