Monday, June 25, 2007

Contrarianism

The NYT has an article about contrarian market theory:

INVESTMENT newsletter editors are markedly less optimistic about the stock market now than they were late last year, when the Dow Jones industrial average was a thousand points lower. This suggests that the bull market may run a while longer, according to the market timing theory known as contrarian analysis.


One of the major factors in our investment process is determining the public's perception of the market. High levels of public participation and rampant bullishness makes us nervous and the opposite tends to make us aggressive investors. Mark Hulbert, who writes the Hulbert Financial Digest, looks specifically at newsletter writers to gain a similar perspective. And based on that research, now is a good time to be in the stock market:

The Hulbert Financial Digest, which has been tracking the investment newsletter industry since 1980, has found that the stock market performs far better, on average, after periods when newsletters are very bearish than when they are quite bullish.

That’s good news today, because the average newsletter editor who focuses on short-term stock market timing is recommending that his clients allocate just 30.2 percent of their equity portfolios to stocks, keeping the remainder in cash. By contrast, at the end of November last year, when the Dow industrials were about 8 percent lower, such editors as a group were advocating an equity exposure of 70.8 percent. That was more than double the current level, and close to the highest allocation that The Hulbert Financial Digest has ever recorded: 79.7 percent.


We are still bullish on Large Cap US stocks.

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