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Newsletter Bullish Sentiment Jumps To Extremes at Trader’s Narrative

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:

Click to see larger chart in a new tab:
HNNSI sentiment bullish extreme Nov 2010

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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6 Responses to “Newsletter Bullish Sentiment Jumps To Extremes”  

  1. 1 hotairmail

    Great stuff. Never too much sentiment content and the more timely the better.

    This is your niche. This is what you do well. This is why I come here.

    Cheers Babak. Thankyou.

  2. 2 Tom

    Amen! Excellent sentiment work. Keep it up!

  3. 3 Jim in Oregon

    One of the few advantages of reaching the senior citizen class of investors is there isn’t a lot that I have not seen at least once before in the markets. What we have today in stocks, precious metals, and most commodities (except those that are soaring due to climatic problems), certainly looks like a classic blow-off to me. If there is no deflationary or black swan event to trigger the correction we will probably see sharp but not heart-stopping declines. If we do get a big shock that scares investors, the correction from these heights could well be a plunge.

  4. 4 Babak

    Jim, glad to have your perspective. Do you mean a major top, as in 2000 or 2007 or a run of the mill correction?

  5. 5 Larry Walker

    Technicals, Fundamentals, Sentiment, Internals, History, none of this matters anymore. BenObiwan has the markets back with unlimited billions per day. PPT is on the prowl every moment of every day. There will never be another plunge or major correction. There will only be small pullbacks so that everyone can buy the dips. It’s the perfect world for the markets. Stay long and don’t fight the Fed. This time it’s different ;)

  6. 6 JIN KANG

    — Hi, which free website can I read or find or know HNNSI everyday ? Thank you.

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