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The sentiment sands are shifting rather quickly these days as the market rally takes most by surprise, forcing them to reevaluate their positions. We’ve already covered the recent data in the weekly sentiment overview and the necessary sentiment addendum so I won’t blame you if you’re sick and tired of sentiment surveys.
The latest development arrives courtesy of Mark Hulbert who is the keeper of a 30+ year sentiment indicator which tracks the mood of newsletter editors for equities, bonds and gold. This is similar to the Investors Intelligence survey which has been running for about the same duration but instead of the whole newsletter universe, it focuses on a smaller subset that actively tries to time the market for various asset classes.
According to Mark’s latest column, there has been a large jump in bullishness on the part of the newsletter editors that try to time the equity market by shifting their exposure.
Currently, the Hulbert Stock Newsletter Sentiment index (HSNSI) is at 60.8% meaning that the average equity market timer is telling clients to be long equities with almost 61% of their portfolio. That is a jump of almost 40% points since late September 2010. And it is very close to the “line in the sand” level of 65% which has coincided with market tops historically.
For example, in late April 2010 the HSNSI peaked at 65.5% along with the market. And again in January 2010 at 65.2%. But then again, this isn’t a 100% reliable signal. As an example, consider that in October 2006 the HSNSI once again peaked at those levels (67.8%) but the S&P 500 index shrugged it off and continued rallying well into February 2007.
The extreme bullish sentiment from newsletter editors towards equities is also confirmed by the Hulbert Nasdaq Newsletter Sentiment index (HNNSI) which tracks the exposure to the Nasdaq Composite by market timers:
The Nasdaq being the home of the more speculative companies, the bullish sentiment for the HNNSI is a bit more volatile with a higher range. Usually we see tops in the 70%-80% range of bullishness but there have been other times where the market has reacted to less bullish levels in the HNNSI.
In April 2010 however this sentiment indicator hit one of its highest levels (80%) just as the market topped out. Last week the HNNSI once again hit 80% implying that the average market timer is suggesting their clients put 80% of their portfolio long the Nasdaq. As of Monday it backed off slightly to 73%.
All this suggests that we are definitely seeing a build up of speculative froth as investors and traders react to the rally by succumbing to the allure of going long. It will be interesting to see what the AAII and Investors Intelligence surveys make of this in the next few days.
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