Are we there yet? Calling the bottom of the market – The Wall Street Journal

The Covid-19 pandemic has sparked a wild ride on world markets. Earlier this month, US markets recorded their best two week gains in 80 years. By the beginning of this week, US equities were up more than 25% since the lows of March, as Bloomberg reports. Traders are wondering whether to go long and whether the worst is over for stock prices. The Wall Street Journal's investment columnist Mark Hulbert examines the data. The true bottom of the market could come when market-timers are proved wrong and finally throw in the towel. His reading appears to be that the bottom is close, with perhaps a bit more to go. – Jackie Cameron___STEADY_PAYWALL___.It's a Scary Time. But Market Timers Have Been More Scared Before..By Mark Hulbert(The Wall Street Journal) – The Covid-19 pandemic certainly seems as scary as anything we have faced in decades. But at least one measure of market sentiment suggests some influential investors don't really believe this to be true as far as the effect on stocks is concerned.There have been a handful of occasions over the past two decades in which there was markedly more anxiety and dread among investors than there has been recently.We know this because of an objective measure of sentiment based on the average recommended exposure levels among more than 50 short-term market-timing advisory services, an average that my firm has calculated daily since the late 1990s.To be sure, the consensus mood among market timers isn't the same thing as the sentiment among investors generally. But the timers collectively have a wide following among individual investors and are sensitive to changes in the direction the financial winds are blowing.Past crisesNote that I am not denying that the pandemic is scarier in any objective sense than anything else we've experienced collectively. It may very well be. I am instead focusing on the reaction of market-timing services to the pandemic, relative to their reaction to past crises. And, at least so far, they have not acted as scared as in previous crises.At the end of the first quarter, these services were recommending that their clients invest essentially all of their equity portfolios in cash or cash equivalents. While that is a significant change from the end of last year, when they recommended on average that clients invest 79.9% of their equity portfolios in stocks, with the rest in cash, it still is markedly more positive than in prior major market declines:• The most recent such occasion was the "taper tantrum" that investors threw in the last quarter of 2018, in reaction to the Federal Reserve's decision to raise interest rates. In December of that year, monitored market-timing services on average were recommending that clients allocate 24.4% of their equity portfolios to going short—an aggressively negative bet that the market would keep falling, more negative than merely being in cash. In retrospect, of course, you might very well scoff at the notion that a quarter-point or half-point increase in the federal-funds rate would be viewed as a more serious event than a global pandemic. Yet the numbers don't lie. That's why it's so important to have an objective measurement of sentiment.• Another occasion came late in the market's decline from May 2015 through February 2016. Many investors have little recollection of that decline, but it was devastating enough to qualify as a bear market in the calendar maintained by Ned Davis Research, the quantitative firm based in Venice, Fla. During that decline, the Russell 2000 index, a benchmark for the small-cap and midcap sectors of the market, fell 23.2%. The MSCI China index fell 40.8%. Near the low point of that decline, monitored market-timing services were recommending that their clients allocate 32.1% of their equity trading portfolios to going short.• And of course we can't forget the Great Financial Crisis. The day after Lehman Brothers declared bankruptcy on Sept. 15, 2008, the average recommended equity exposure fell to the aggressively bearish posture of being 42.9% short.The judgment of contrariansIt's important to put current anxiety into perspective for more than historical accuracy. It also helps contrarians to determine whether there is enough despair and pessimism to indicate that a bear market has bottomed..Contrarian analysts, of course, believe that bear markets don't come to an end until investors throw in the towel in despair and give up on the notion that a new bull market will start soon. Though it's difficult to translate "throwing in the towel" into a certain average recommended level of equity exposure among short-term market-timing services, that level is clearly lower than where the average stood at the end of the first quarter.At the bottoms of all bear markets in the Ned Davis Research calendar over the past two decades, for example, the average recommended equity exposure level called for being 13.1% short. That's 13 percentage points lower than where that average stood at the end of the quarter.This could mean that there will be a retest of the stock market's March 23 lows, which were below 18600 on the Dow Jones Industrial Average (compared with over 21000 today. The market's decline last week may be the beginnings of just such a retest. If the market does fall below those lows it will be discouraging to many of the timers who are betting that the worst is now behind us.If they react at that point by throwing in the towel, however, that could end up being the true bottom.– Mr. Hulbert is a columnist whose Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at reports@wsj.com.

Are we there yet? Calling the bottom of the market – The Wall Street Journal

Related Stories