Saturday, August 20, 2011

Bottoming is a messy process

In retrospect, from a contrarian point of view, it was far too suspicious that many were so quick to declare that last week’s intra-day low was a bottom.

Bottoms are rarely so neat and tidy, and are rarely accompanied by an eagerness to declare it as such.

Consider the average recommended equity exposure among a subset of short-term stock market timers tracked by the Hulbert Financial Digest (as represented by the Hulbert Stock Newsletter Sentiment Index, or HSNSI). At its low last week, this average stood at minus 19.5%, which indicated that the average short-term market timer was then recommending that clients allocate 19.5% of their equity portfolios to shorting the market.

Currently, the HSNSI stands at minus 7.5%, or 12 percentage points higher, even though the Dow Jones Industrial Average DJIA -1.57% is now back to the vicinity of last week’s mid-week intra-day low.

Even more ominously, from a contrarian point of view: Nearly six of these 12 percentage points came on Thursday, despite the market’s 420 point plunge.

Read more Bottoming is a messy process

Original content Bob DeMarco, All American Investor