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Wednesday, February 6, 2013

Another Warning For Market....

Published by SentimenTrader on Feb. 5, 2013.


We've been highlighting sentiment surveys much more than usual lately.  While given a lower weight in our models than real-money indicators, they are still valuable inputs, and recently they've surged to remarkable levels.

The survey of investment newsletter writers from Hulbert Financial Digest is theoretically better than most, since it focuses on actual trading recommendations instead of sometimes-ambiguous opinions.  It's a step closer to a real-money indicator than other surveys.

Like we're seeing with active investment managers, newsletters have accumulated extensive exposure to stocks.  In fact, like active investment managers, that exposure is at record levels.

The chart above shows an average of the recommended exposure to stocks (commonly the S&P 500) and the Nasdaq.  The current reading of 76% is a record, tied with two weeks in the year 2000 (March 31, 2000 and July 14, 2000).
  There have been a total of 9 weeks when the combined level neared 70% (a couple of them were clustered together).  A month later, the S&P 500 showed a negative return every time, a median of -3.1%.  Its maximum gain during the next month averaged only +0.1% (using weekly closes) while the maximum downside averaged -4.4%.

Even over the next six months, returns were poor.  Only 1 of the 9 weeks had a positive return (+1.9%), and the median was -4.25%.  The most that the S&P rallied during the next six months averaged only +0.7%, while its maximum decline averaged -13.8%.

The sentiment surveys, obviously, are suggesting a highly negatively skewed risk/reward ratio here for stocks.  We don't have a lot of confirming evidence from our other indicators, but it's enough to be worrying on an intermediate-term time frame.
 

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