11/04/11 Every move you make, Every vow you break

Hulbert checks in a week later. Exuberance persists.

http://www.marketwatch.com/story/looks-and-smells-like-bear-market-rally-2011-11-04?link=MW_story_popular

'Contrarians believe Oct. 4 lows will be broken'

'It’s been exactly one month since the S&P 500 dipped into official bear market territory. In the wake of the 17% rally since the Oct. 4 intra-day low, advisers have been falling over themselves retreating from the bearish camp and jumping back on to the bullish bandwagon.

'That kind of behavior suggests that what we’re seeing is a bear market rally.

'I noted this disturbing sentiment trend one week ago, on the day of what so far has been the high for the month-old rally. Unfortunately, developments on the sentiment front since then paint an even more disturbing picture.

'Consider the average recommended equity exposure level among a subset of the short-term stock market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Stock Newsletter Sentiment Index, or HSNSI). Even though the stock market is lower today than where it stood one week ago, this average has continued to grow.

'This suggests a stubbornly held optimism on the part of the average market timer, which is a dangerous condition, according to contrarian analysis.

'The HSNSI is now 51 percentage points higher than where it stood a month ago. To put that in context, consider that over the first month of the last six bear markets, the HSNSI never grew by that much. In fact, the average increase in this sentiment index over each of those six bear markets’ first month was just 19.9 percentage points.

'These disturbing sentiment trends are even more evident among those market timers who focus on the Nasdaq market. That market is quite susceptible to changes in investor mood, and is therefore a particularly sensitive barometer of sentiment.

'According to the Hulbert Financial Digest, the average recommended exposure levels among these timers is now 106 percentage points higher than where it stood a month ago. This is 12 percentage points higher than the week-ago level, even though the Nasdaq Composite Index is lower today than then.

'Is there any way for the market to escape the bearish conclusion to which contrarian analysis leads? Advisors would have to beat a quick retreat in coming sessions which, while possible, appears unlikely.

'The unfortunate conclusion is that the Oct. 4 lows are likely to be broken.'