NEW YORK (MarketWatch) -- Buy when there's blood in the street? A veteran letter editor says his celebrated sentiment measure disputes that despair is dominant, but he's looking for a short-term rally.
Last week, Mark Hulbert wrote that his Hulbert Stock Newsletter Sentiment Index (HSNSI), which reflects the average stock market exposure among a subset of short-term market-timing newsletters tracked by the Hulbert Financial Digest, had dropped to minus 30.1%, very close to its lowest level in over six years. (See Mark Hulbert's Oct. 21 column for more.)
The negative reading means that the average short-term market-timing newsletter is recommending that subscribers be short the stock market.
Last Friday, the HSNSI has recovered slightly, to 19.78%.
These low levels are usually followed by market rebounds. But it's important to note that the HSNSI effect is extremely short-term -- that is, it's not necessarily portending a 1974-type epochal bear-market bottom.
For example, the HSNSI was very low in 1999, when the Dow Jones Industrial Average (DJIA) hovered for a while below 9,000, before launching a determined blow-off assault that took it above 11,000.
That move higher indeed vindicated the HSNSI in the short term -- but for the long term, of course, the market did collapse down several thousand points.
Michael Burke was around in 1974 and his Investor's Intelligence has long published a widely quoted sentiment measure.
Burke's measure has always appeared to us less scientific, because it involves his subjective assessment of what each advisor is saying, which (in Mark Hulbert's experience) can differ from what they actually do.
Still, the only thing that really matters is which measure works. Mark thinks Burke's is superior, but he's not ready to publish proof.
Burke shows the bears gaining, but far from having the upper paw. As he wrote last week:
"The bulls were slightly lower this week to 45.3%, from 45.8%, while the bears edged higher to 29.5%, from the previous 29.2%. Those calling for a correction rose to 25.2%, from 25.0%. This group is short-term bearish, but view pullbacks as buying opportunities, and long term expect the market to go up. ..."
Still, Burke noted that this constitutes a "quick shift" in sentiment among advisors from early September, when bulls reached nearly 55% and bears stood at nearly 25%, and added: "The difference betweeen the bulls and bears decreased to 15.8% from 16.6%, and this continues to move in the right [i.e., bullish from a contrary opinion standpoint] direction."
Burke's looking for a short-term rally: "We noted last week that short-term indicators were universally bearish but also with declines to oversold lows, last seen in the spring. We are now seeing some reversals up and those lead to bull confirmed.
"Medium-term [six-month] indicators have also achieved lows shown in April, and if they hold there is still the potential for a year-end rally. The weekly Master Indicator, a compilation of our technical timing tools, reversed up from prior bottom levels this morning. This is a sign that the next major index move should be up. ..."
That said, he's remains very cautious, leaving his equity mutual fund invested position unchanged at 20%. "We will keep the defensive team on the field until indicators ... improve," he said.
One final sentiment signal: I recently reported on a crash alert put out Oct. 19 by Bob Prechter in his Ellliott Wave Theorist. (See Oct. 20 column.)
The Dow had promptly made a triple-digit gain -- but hey, it gave most of it back Thursday and finished Friday below the point at which Prechter had pronounced.
Nevertheless, this interesting news provoked reader e-mail that was vitriolic even by the standards of my previous columns on Prechter.
There are masses of people out there who hate bears. And that, as one of my very few Prechter-tolerant e-mailers observed, could prove worrying.