Monday, 18 October 2004

Mark Hulbert is bearish

Mark Hulbert, who tracks investment newsletters for CBS MarketWatch, is bearish. His reasons: Oil and complacency.

In "Do stocks and oil mix?", he writes:

To appreciate how unusual it is for the stock market to be strong in the face of rapidly rising oil prices, consider an academic study completed earlier this year by Ben Jacobsen, a professor of finance at Erasmus University Rotterdam, and two of his students, Gerben Driesprong and Benjamin Maat. (Read the study.)

To isolate oil's impact on stocks, these academics focused on the stock markets in 18 developed nations and in 30 emerging markets. Their study encompassed trading history as far back as 1973, when oil's price began to trade freely... It won't surprise you to learn that rising oil prices are bearish. But what may surprise you is that it takes an increase of at least 5 percent in a given calendar month to justify getting out of stocks in the next month. Why 5 percent?... Because, according to the researchers, stocks' long-run tendency is to go up. So it takes more than a mere modest oil price rise to counteract that long-run bullish tendency.

In "Complacency plagues newsletters", he writes:

[N]ewsletter editors have only begrudgingly reduced their equity exposure in the face of the market's decline. By no stretch of the imagination are they showing the signs of capitulation that typically are seen at market bottoms.

Based on Hulbert's sentiment index, newsletters are relatively optimistic now whereas two months ago, when the market was trading at more or less current levels, the average newsletter editor was net short the stock market. And in mid-May, when the market was also around current levels, the average newsletter was even more bearish.

Hulbert's conclusion: "Newsletter editors collectively have become complacent."

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