Newspaper article THE JOURNAL RECORD

In a Bull Stampede, They Hear the Bears' Growl

Newspaper article THE JOURNAL RECORD

In a Bull Stampede, They Hear the Bears' Growl

Article excerpt

The bear market is not over, despite the impressive market gains of April, when the Nasdaq Composite surged nearly 27 percent.

That is the current argument of many contrarian analysts, who try to time the market by interpreting investor psychology. They call the April gain a bear-market rally, and they say we have yet to see the kinds of behavior that historically have been the hallmarks of major market bottoms.

This psychological perspective is called contrarian analysis, because the market typically does what is contrary to the beliefs of the majority of investors. In other words, bull markets like to climb a wall of worry; they near their end when the vast majority of investors have overcome their skepticism and jumped aboard. By contrast, bear markets thrive when the prevailing mood is hope, and do not end until dejection and despair displace it.

To be sure, contrarian analysis is as much art as science. No single barometer can tell exactly what the average investor is thinking and feeling. And even though the market typically frustrates the majority, there is no guarantee that it will always do so.

Nevertheless, one gauge has proved as good as any over the years in judging investor psychology: the market sentiment of investment newsletter editors. They are extremely sensitive to changes in how the wind is blowing -- and are not above changing their tunes accordingly. If greed rather than fear is predominant among investors, for example, then a significant number of newsletter editors will start catering to that greed, even if they personally are worried about the risks.

These days, the consensus among such editors is quite cheerful, based on a review of the market outlooks of the 160 or so newsletters monitored by The Hulbert Financial Digest. During April, the editors of these newsletters were incredibly quick as a group to return to the bullish camp.

But from a contrarian point of view, that is a bearish sign.

Consider the average recommended equity exposure among a particularly hyperactive group of these editors -- those who update their advice daily by Internet or telephone hot lines -- and who shift much or all of their portfolio into or out of equities when they change their minds. …

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