Investors Are Most Bearish Since Dotcom Bubble Burst

Financial analyst and journalist Mark Hulbert said this week that investors are now the “most bearish” since 2000. So who is Mark Hulbert? He has been the editor of the Hulbert Financial Digest since 1980, a publication best known for tracking the performance of investment newsletters.

He also publishes the Hulbert Nasdaq Newsletter Sentiment Index (HNNSI), which he says “reflects the average recommended stock market exposure among a subset of short-term market timers tracked.” Hulbert believes that the collective mindset of these traders reflects the mindset of the investment public. That’s often proven to be true.

HNNSI is a “contrarian” indicator: If it is high, he views the outlook for stocks as poor; conversely, when it is low, his outlook for stocks is good.

Contrary Opinion Theory holds that if too many people are bullish, the stock market is likely to go down; on the other hand, if too many people are bearish, the market is likely to go up. I put some stock in contrary opinion, but recognize it is just one indicator out of many.

Hulbert reported this week that bearishness has reached an extreme high not seen since 2000, while bullishness has fallen to an extreme low – most notably since the end of March.


Hulbert believes this plunge in bullishness and spike in bearishness is a “bullish omen.” He believes that as a result of this, stocks are much more likely to go up from current levels than continue lower. The extreme bearishness reading suggests that many investors and traders have bailed out of the market recently, and when they come back in, it will drive the market higher.

The difficulty is that big spikes in bullishness or bearishness typically occur at market extremes, either way up or way down. The question is, does the recent market downturn qualify as “extreme”? That’s hard to say.


On the one hand, stocks have fallen off a cliff (so to speak) since mid-August, including that frightening market open on August 24 when the Dow plunged over 1,000 points in just a couple of minutes. That no doubt made a lot of investors turn bearish!

On the other hand, the equity indexes really haven’t fallen very far in the latest correction. From their mid-August levels to the worst close on August 25, the Dow was only down about 10.3% and the S&P 500 only 10.5%. While both qualify as a “correction” (down 10% or more), I don’t know if the recent action warrants calling it “extreme.” Hulbert thinks it does:

“What particularly stands out about the latest HNNSI readings is not that it’s low, though it is. What’s noteworthy is that its current level [of bullishness]is a lot lower than where we would otherwise expect it to be, given the market’s recent action.” [Emphasis mine.]

Hulbert says the HNNSI is at the lowest level ever since data became available in early 2000. So maybe the recent action does qualify as extreme – I’ll give him that. In any event, most analysts expect that we’ll see a retest of the August lows; if those lows hold, then most expect the bull market to resume.

Hulbert certainly believes that is the most likely scenario based on the extreme level of bearishness that exists today. We’ll see if he’s right.

Interestingly, the S&P 500 Index may have retested its August low this week, and it rallied strongly yesterday. We’ll see if the rally continues (not so far today).


Back in March and April, I warned that volatility was going to increase significantly and recommended that readers dial-back their long-only (buy-and-hold) exposure in equities. FYI, I’m not nearly as confident as Hulbert that the bull market will resume just ahead.

In closing, if you are uncomfortable with this level of volatility, I strongly suggest you look at some of the active money managers we recommend at Halbert Wealth Managementin particular, those who can move to cash and/or hedge long positions in down markets.

Finally, for those of you who do not subscribe to my weekly Forecasts & Trends E-Letter, I invite you to take a look. Best of all, it’s FREE and I publish it on Tuesdays.

I mention the E-Letter today because on Tuesday I will be announcing a new SPECIAL REPORT I just completed which addresses the recent spike in stock market volatility and the seven main risks of being in the market today.

If you want to get the SPECIAL REPORT, be sure to subscribe to Forecasts & Trends E-Letter today.

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