Arrow © Pete Starman, Photographer
"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.
Can you time the market?

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.

TICKERS IN THIS ARTICLE

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 -0.57%, news) 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.
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10Comments
cooperative spriit
1 hour ago
avatar
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.
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NeoCapitalist
1 hour ago
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"Stocks headed higher"

Good luck with that investment opinion. I'll take the contrarian view.
Blank-en-ship
44 minutes ago
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Just yesterday we were told there was going to be a sale coming (see 7 reasons for a September crash), so let me put this together...sooner than later the market is going to go down and then it will go up again. That's about the crux of it, right? Alrighty then, given that, it'll probably go down after that and then back up...[[[ tapping my temple with my index finger ]]]...I gotcha. Wasn't even peering into a crystal ball there and I didn't dial up the Psychic Friends Network either - I hear they get it wrong half the time anyway.
Nikongreg
8 minutes ago
avatar
so, why do any of us bother reading or commenting - turn off your computers and play
Mr Fat Cat
37 minutes ago
avatar
Well we all know the worst market timers and investors are the forum morons. At the moment, they are predicting the end of the world and are greedily clutching their little sacks of Gold! Their bearish stance will certainly spell the end of their world unless you consider a diet of KFC at the Salvation Army and a cardboard box under a bridge a life.

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.

I'll be instructing Santa to put a huge lump of coal in the moron's stockings!

Har har har!
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MARKET UPDATE



NAME LAST CHNG % CHNG
# VDIGX 19.35 -0.11 -0.57
VDIGX
NAME LAST CHANGE % CHANGE
# DOW 14,897.55 -105.44 -0.70
# NASDAQ 3,599.79 -13.80 -0.38
# S&P 1,642.80 -9.55 -0.58
# Sm Caps 1,021.58 -6.99 -0.68
# 10 Yr Note 96.59 +0.41 +0.42
NAME LAST CHANGE % CHANGE
# Nikkei 13,263.36 -160.97 -1.20
# FTSE 100 6,390.84 -62.62 -0.97
# DAX 8,285.41 -14.62 -0.18
Market index data delayed by 15 minutes