8/21/2013 7:30 PM ET|
Smart money: Stocks headed higher
Market timers with the best long-term performance remain as steadfastly bullish as they were 3 months ago, while those timers with the worst records are more bearish.
"The best are bullish; the worst are not."
That's the lead sentence of a column I wrote for Barrons.com in late May, just as Federal Reserve Chairman Ben Bernanke was sending the stock market into a tailspin by discussing a possible acceleration of the timetable for "tapering" monetary stimulus.
Believe it or not, that headline remains equally appropriate today.
To be sure, a lot has happened since late May. The market quickly recovered from the Bernanke-induced tailspin and rose to new all-time highs in July and early August. But stocks last week appeared to hit a significant air pocket, turning in back-to-back triple-digit declines. Might the market be now embarking on the major decline that many worried about in late May?
Anything is possible, of course. But the market timers with the best long-term performance remain steadfastly bullish, while those timers who have done the worst job calling the market's turns are even more bearish than they were in late May.
This best-versus-worst contrast doesn't mean the bull market is guaranteed to continue, of course. And, in any case, a shorter-term market correction could happen at any time.
Still, in order to be bearish right now, you have to believe that the market timers who in the past got it most wrong will now be right — and that those who have been most right in the past will now get it wrong. That seems like a low-probability bet.
When determining which market timers are in the "best" and "worst" categories, I am focusing on long-term performance -- the past 20 years, in fact. So the best timers have proved themselves over a period containing both strong bull markets and punishing bear markets. A bullish stopped clock would not qualify as a best timer, therefore, just as a bearish stopped clock wouldn't automatically make it into the "worst" category.
The Hulbert Financial Digest has market timing records for three dozen services over this two-decade period. The nine that have the best risk-adjusted returns are currently bullish. On average, in fact, they are recommending that their clients allocate 99.9% of their equity-oriented portfolios to the stock market. This is essentially unchanged from the situation that prevailed in late May, when the comparable average exposure level among the best long-term timers was 99.4%.
Encouraging to the bulls
There has been a big change among the worst timers, however. The 25% of market timers with the worst records over the past 20 years are quite bearish right now, on average, recommending an equity exposure level of minus-36%.
This negative exposure level means that the typical timer in my "worst" category is recommending that his clients allocate a third of their portfolio to shorting the market -- an aggressive bet that the market will decline. In late May, in contrast, the consensus stock exposure level among the worst quartile of timers was plus 25%.
In other words, while the best timers are just as bullish today as they were in late May, the worst timers are significantly more bearish.
As a result, there is now a significantly wider spread between the consensus exposure levels of the best and worst -- 136 percentage points, versus 75 points in late May.
If past performance counts for anything, this contrast has to be encouraging to the bulls.
Might there be a catch? Might there be some quirk of the 20-year time period on which I focused causing this huge of a contrast between best and worst?
To rule out that possibility, I constructed groups of best and worst timers over other time periods as well — the last one, three, five, 10 and 15 years. Regardless of the period, there was a similarly large contrast as with the best and worst 20-year performers, with the best timers far more bullish than the worst.
As mentioned above, however, virtually all of the top performers say that a shorter-term correction could occur at any time. A few of them go further and say that they would actually welcome such a pullback as increasing the long-term health of the market.
Furthermore, the consensus of the top timers is not to go way out the risk spectrum and make particularly speculative bets.
Consider, for example, the mutual fund that is currently most popular among these top timers. It is the Vanguard Dividend Growth (VDIGX) fund, which focuses on blue-chip companies with a long record of sizable dividend increases. It is significantly less volatile than the overall market, with a beta of just 0.65 over the last 15 years, according to Morningstar.
More from Barron's:
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1. The DJIA simply represents 30 of the largest and most widely traded stocks in the United States. It is like a computer that has built in protection from attacks. When one of the 30 companies is under performing, the administrators of the index simply change the list, like when Kodak was replaced by a pharmaceutical company. Problem solved.
2. The market may rise or fall 500 points in one day, but the real value of those companies has not changed that much in 24 hours. We see then, that there is a difference between perceived value and real value. The "real" worry is whether those companies are over inflated by a perceived value.
3. Wall Street is a country unto itself, and not representative of Main Street. Wherever I travel in the US, more stores, restaurants, and businesses are closing, and more for sale or lease signs appear everywhere.
It is therefore; quite possible that Main Street could collapse, while Wall Street can artificially hold itself up, but eventually, the weight of the US Debt alone, as it continues to increase, will take its toll.
4. Wall Street has no talent, other than to shuffle papers around electronically for profit. The US Government has even less talent. The governments cannot invent anything, nor design anything, nor make it, nor sell anything for a profit. All the governments can do is tax, spend, and make laws.
Only until we understand the intrinsic value of small businesses, and contribute to their growth instead of the Wall Street elites, will we be able to underpin the crumbling foundation of America and its largest employer- small businesses.
Small businesses are the forgotten majority, and I am a member.
Stock market brokers must be eating prunes every day.
They seem to have a cronic diarrhea.
I hope the feds stop buying back bonds and let the market take care of itself...
Really people just Invest for the Long Term and don't worry about all these short term fluctuations !
Making money is simple - Invest in Quality - Iconic - Dividend Stocks. It will go up and down yes - but just re-invest the Dividends and let Compounding do its work - in 30 or 40 years you will be rewarded handsomely - While all the Doom and Gloomers will be fighting for a spot on the Governments Teat !
.....................................bullish - you MUST be kidding..................................................
Say what you will - the logic that the market will dramatically correct in September (as per yesterday's article) makes much more sense than this author's opinion. The market is ready to massively knee-jerk (downward) once Bernanke starts the tapering process in mid-September. My money is on a taper in 4 weeks.
Later in the year - yes, it will probably rocket up again....once we see a 10-15% correction over the next 6-8 weeks.
Could go up 'cause of continued Fed pressure. Might take the proverbial September Swoon.
Is there any way they really can stop QE? We can't afford to pay higher interest rates.
This has got to end badly, but I'm not thinking next month.
What happens in January when Ben quits?
"Stocks headed higher"
Good luck with that investment opinion. I'll take the contrarian view.
Mr Fat Cat,
Just because I don't go around ACTING like I'm worth millions, and bragging about how much money I have, DOES NOT mean that I am poor. I'm well off enough so that I'm not going to starve, and I'll always have a roof over my head, thank you. I just don't go around bragging about how much money I have. When I was brought up, I was taught that ONLY VULGAR people, who had no class, BRAGGED about how much money they had. Just because I have sympathy for the way poor and/or middle class people are being treated and they way they're being screwed over, DOES NOT MAKE ME A POOR PERSON. In fact many of my neighbors would be SHOCKED at how well off I REALLY am. But like I said I was brought up differently.
Of course the market is continuing to head upward:
Bernake continues QE3,
CDs and savings pay no interest, so...
The freshly printed money finds it way into stocks, artificially inflating prices with free money.
It's not rocket science, just bad economic policy.
"My forecast is quite simple, and it hasn't changed since early this year. We are in a correction that has further to go. It is likely when it is all over, the pullback will be at least 10%. This will represent a significant buying opportunity! I think this will happen end of September early August. I see the market getting close to 17K by the end of the years."
This BOOB takes money for giving advice like this. Forecast-- simpleton, not simple. The last valid point for the Dow was pre-QE or just under 7,000. QE has no substantiation so we fall back to 7,000. Since QE, business platforms have gotten less capable of enterprise so expect them to spend money to retrieve the "talent" they fired before becoming administrative platforms-- or go bust. It's 8/22/2013 so that "early" August forecast sums up your "simple" simpleton. As for 17,000, you go right ahead and anticipate another HUGE free money festival for grubbers, but without QE it would only be coming from Fat Cat's like you, not from America. We have small businesses to get growing and a country to flush clean of administrative, financial and political crap pariah like you. Go get a REAL job.
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[BRIEFING.COM] S&P futures vs fair value: +2.90. Nasdaq futures vs fair value: +6.50. The stock market is on track for a modestly higher start as futures on the S&P 500 trade three points above fair value. Index futures hovered in the red through the majority of the overnight session, but climbed off their lows after European markets opened for action. At this time, indices in Germany, France, and the UK hold gains between 0.6% and 0.9%, while Italy's MIB (+1.1%) outperforms amid ... More
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