A Hulbert Tracked Sentiment Index at Dangerous Levels

By on December 18, 2010

Mark Hulbert tracks newsletter performance and he also has created a few sentiment indexes.  One Hulbert has designed is suggesting a cautious market stance (for those who like to trade):

Consider the average recommended equity exposure among a subset of short-term stock market timers, who focus on NASDAQ stocks (as measured by the Hulbert NASDAQ Newsletter Sentiment Index, or HNNSI). This is a useful sentiment measure on which to focus, since the NASDAQ market is one in which sentiment plays a particularly large role (remember the Internet bubble?)

The HNNSI currently stands at 73.3%, which is disturbingly high. The only other occasions this year when this sentiment benchmark got any higher were early November and late April/early May. Both occasions turned out to accompany stock market highs — and in the earlier case came immediately before the infamous Flash Crash and severe May-June correction.

Hulbert also points out a couple of additional sentiment indexes that are indicating possible trouble ahead:

One is the weekly survey of investment advisers compiled by Investors Intelligence. Its latest reading, from earlier this week, shows a slightly higher level of bulls today than existed at the April market high. In fact, Investors Intelligence is reporting that the current level of bullishness is the highest since December 2007. Of course, that earlier period of excessive optimism came just as the 2002-2007 bull market was rolling over into a severe bear market.

Equally a source of concern is the Crowd Sentiment Poll compiled by Ned Davis Research, the quantitative research firm. To be sure, one of the components of this Poll is the Investors Intelligence survey, so this result is not particularly surprising. But the Poll reflects a number of other sentiment measures as well. And it currently stands at 69%, well into the “Excessive Bullishness” territory, and above the Poll’s average level at prior market tops.

Source: Marketwatch
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