Are bullish market newsletter editors ignoring blinking yellow light caution signals? According to well-known newsletter analyst Mark Hulbert, the answer might well be yes.

Speaking to a crowd of well-heeled investors at February's Money Show in Orlando, Fla., who paid several hundred dollars to attend small group gatherings with noted figures in the investment community, Hulbert, editor of the eponymous Hulbert Financial Digest, pointed to trouble ahead. His index of newsletter sentiment stood at 58.2, just 20 points under its all-time high of 79.7 set in February 2001.

It's a number Hulbert says should give advisors pause. "We are not at the final top for this rally, but it's risky," Hulbert said. "When sentiment is this high, it doesn't take much to trip up investors. It's the truck that blindsides you that does the most damage."



Hulbert has been monitoring the world of investment newsletters since 1980, ranking and analyzing the best and worst-and all those in between-in the business. He's currently following about 190 newsletters. Besides the Digest, he also runs the contrarian Hulbert Stock Newsletter Sentiment Index.

Hulbert's index is meant to work as something of a reverse market timer. When short-term-minded newsletter editors/investors are heavily invested in stocks, Hulbert believes the market is likely near both a high and an ensuing sell-off. He's quite adamant that high levels of confidence by newsletter gurus are almost always a worrisome sign. Conversely, when the market timers are sitting on the sidelines, Hulbert recommends we go forth and invest as a rally is likely coming soon.

That said, the index is a short-term indicator, relevant for about three months ahead. "A contrarian analysis (might) say this is a higher risk period. That doesn't mean it is the beginning of a bear market. It just might mean a significant correction," he explains.

We now know that 2010 was indeed a good year for stocks. When Hulbert spoke at the February 2010 Money Show, his outlook was the opposite of today's. His index read at a relatively low 13.8, with many newsletter editors keeping large amounts of cash on the sidelines.

"The mood last year was very pessimistic, if not outright despairing. This was not typical of stubborn bullishness you see at the top of a market so, therefore, it was not a bearish sign," Hulbert recalls.

Unsurprisingly, that record doesn't dissuade today's bulls. Money manager Laszlo Birinyi, for example, has said he believes the current stock market rally has three years of life left based on his own cyclical gauge-in his case, readings of previous rallies.



Despite Hulbert's contrarian rule, every market-be it bull or bear-is unique. For example, sometimes people are bullish in the short run and bearish for the big picture. In the current environment, many of the newsletters he is tracking can best be described as only short-term bulls, he says. Overall, they remain pessimistic about the future. "You have some incredibly contrary positions held by the same editors," he says, adding somewhat dryly, "It's difficult for a contrarian to know how to deal with this."

Other data is equally perplexing. As with Hulbert's index, the Investors Intelligence U.S. Advisors' Sentiment Report is trending higher while at the same time reporting that increasing numbers of financial advisors are expecting market conditions to deteriorate. On the other hand, the Bank of America Merrill Lynch Survey of Fund Managers February survey reveals the most bullish investors in a decade.

It's also possible to be pessimistic for today and staunchly believe in a future of soaring stocks. That's certainly the take of Michael K. Farr, president of investment management firm Farr, Miller & Washington, with offices in Washington and Wayne, Pa.

"I think the market is well over due for a pullback," he says about the current investing climate. "When you never hear a discouraging word, you are due for something discouraging." But his multiyear outlook says the United States is in the early stages of another bull market, where investors will continue to pour money into stocks as the economic situation continues to improve.



Confused? You can always take a look at another notorious stock predictor, the Presidential Year Cycle theory of investment, which Hulbert discussed in another Money Show presentation. Originally elaborated by Yale Hirsch, the founding editor of Stock Trader's Almanac, the Presidential Year Cycle theory works like this: Every president wants to get reelected, so the best way to do this is to make sure the economy is in great shape on Election Day.

Early in their term, presidents will take the hard steps that they deem necessary to best ensure economic security in the latter half of their term in office, fairly secure in the knowledge that voters cast their votes in the here and now, not based on remembered pain a year or two earlier. As a result, year three of a presidential cycle is almost always an up year for the stock market.

What's most intriguing to Hulbert, however, is that newsletters that do best in presidential third years are not even close to the best forecasters overall. Hulbert's year-three champ over the last four presidential cycles is The Oberweis Report, edited by Jim Oberweis and devoted to small-cap stocks, which has had a 69.2% annualized return in year three of the presidential cycle. Its overall Hulbert rank is 62, with annualized returns of 6.9%. Quite a difference.

In second place is The Ruff Times, edited by gold bug and veteran market doomsayer Howard Ruff, with a 54.6% return in the same period. Its overall rankings are somewhat better than The Oberweis Report, with a 9.5% annualized return just enough to allow it to sneak into Hulbert's top 20 newsletters.



So what gives? Hulbert blames volatility. The top performers in his analysis of third-year presidential cycle returns over the past four cycles were 2.27 times more volatile than the stock market itself, tending toward riskier investment strategies. "That risk paid off when the stock market rose, but worked against them when the market was flat or declining," he observes.

A caveat: Stock markets are supposed to perform below average in the first half of a presidential cycle. As we know, that didn't happen in 2010. Hulbert believes that as more people have become aware of the presidential cycle, bullish sentiment was pushed earlier. "At what point do enough people know about something to kill the goose that laid the golden egg?" he asks rhetorically.

Don Luskin, founder and chief investment officer of TrendMacro, an economics firm, has a different take. In his view, the last downturn was so different from any previous market that none of the usual indicators are working. His evidence? The well-regarded Economic Cycle Research Institute's Leading Index fell to levels last summer that led many to predict a double-dip recession was on the horizon. That didn't happen, either.

As for Hulbert, he admits nothing is perfect. "Every contrarian is trying to find an indicator that you can do the opposite of, but no one has ever found it, " he notes. "My tool is a valuable contribution, but it is not the be all and end all."


Helaine Olen is currently writing The Wishing Well, a journey through the personal finance and investment culture, for the Penguin Group's Portfolio imprint.

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