In his column for Barron’s, Mark Hulbert reports that his analysis shows that “the best bear market strategy may very well be to stay 100% invested in equities.” He says that looking at the data on Hulbert Financial Digest-monitored advisors suggests this approach because “each of the top-five advisors for performance since March 2000 is fully invested right now” and those who switched to cash during the 2000-02 and/or 2007-09 bear markets “failed to get back into the stock market at anywhere close to the bottoms . . . [and] therefore missed out on a good chunk of the markets’ subsequent recovery.”
First place among the top performers, Marc Johnson, editor of The Investment Reporter, explained his outlook: “Some observers are alarmed by corrections and bear markets. They see these market setbacks as disasters. Our view is different: stock market setbacks can create wonderful buying opportunities.” Similarly, second-place top performer Kelley Wright of Investment Quality Trends says: “My thought is the market is simply taking care of business it was on track to do last summer” and “there are some really good values in some really great companies.” Hulbert notes that the top performers share “a bias toward value stocks,” which “historically have lost less money during bear markets” and often pay dividends.
Looking at market timers yields the same recommendation: “a far safer bet is choosing to withstand the bear market losses in order to guarantee you’ll capture 100% of the bull market’s gains.” Less than half of market timers had lower exposure at the bottom than at the top in previous bear-to-bull transitions, suggesting they are “bearish when they should be bullish, and vice versa.” Only 6% of market timers correctly predicted the top and bottom of the 2007-09 bear market. Of those who did meet one of Hulbert’s three tests for the 2007-09 bear market, less than half also did so in the 2000-02 bear market, suggesting successes may have been more luck than skill in market timing.
Mark Hulbert reports at Market Watch that, based on his survey, “the stock market timers with the best records are bullish, on balance, while those with the worst records are bearish.” He notes that this remains true when periods ranging from 12-months to 20-years are used to assess performance. Further, “since the stock market over [the last 12 months] has declined by about 10%, and turned in one of the worst Januarys in years, bearishly inclined market timers would have a distinct advantage,” but the best performers are currently bullish. Hulbert’s “best-versus-worst contrast” as a measure has mixed results in predicting the market. It was bullish when market fell 20% in 2011, but the best timers were more bearish than the worst just prior to the 2008 crisis. Chart below sourced from MarketWatch.com.
In his MarketWatch column, Mark Hulbert highlights the use of margin debt as a market indicator. Margin debt is the total amount investors borrow to purchase stocks. As Hulbert notes, research by Norman Fosback, former president of the Institute for Econometric Research, concludes that “a good long-term indicator can be created by comparing total margin debt with its 12-month moving average.” If the current level is above the 12-month moving average, it is considered a bullish indicator; if below, a bearish one. Fosback’s research suggests “an 85% probability that a bull market is in progress when the indicator is bullish, in contrast to only a 41% probability when the indicator is bearish.” The indicator appeared to work well in the 2007-09 bear market, but not as well in 2011. Currently, it has been sending bearish indicators for five straight months.
Mark Hulbert writes in MarkWatch: “not infrequently, a bear-market declaration often amounts to little more than closing the barn door after the horses have left.” A bear market is typically defined by a 20% or greater decline in stock prices. In the last U.S. bear market (2011), for example, “the early-October day when the S&P 500 fell to 20% below its late-April high turned out to be the day that the bear market breathed its last gasp.” Because the average length of a bear market since 1900 is 403 days, “even if it is eventually determined that a bear market began last June, if it’s no worse than average it’s already more than half over.”
Mark Hulbert opines in MarketWatch that “The stock market has to fall a lot further before the valuation indicators will be blowing in the direction of higher prices.” He looks at six valuation indicators and maintains that “recent weakness has simply worked off an extreme overvaluation.” Hulbert notes that current valuations are higher than at 71% to 89% of bull market peaks back to 1900.
Specifically, he points to the following:
- Price/book ratio is at 2.6 to 1, which is higher than at 23 of the 28 bull market peaks since the 1920s.
- Price/sales ratio is at 1.1 to 1, which is higher than at 16 of the 18 bull market peaks since the 1950s.
- Dividend yield is at 2.2% for the S&P 500, which is higher than at 30 of the 35 bull market peaks since 1900.
- Cyclically adjusted price/earnings ratio is at 25.9, which is higher than at 30 of the 35 bull market peaks since 1900.
- The “Q ratio” developed by Nobel laureate James Tobin shows the market to be more overvalued than 31 of the 35 bull market peaks since 1900.
- Price-to-earnings ratio is estimated at 20.1 to 1, which is higher than at 71% of past bull-market peaks.
Weakness in the Dow Jones Transportation Average, which is the oldest stock market index, has “bearish implications,” according to Mark Hulbert of MarketWatch. A recent U.S. Department of Transportation report concluded that, over the past three decades, the index “led slowdowns in the economy by an average of four to five months.” Hulbert also cites “Dow Theory, the oldest stock market timing system in widespread use today,” and its proponent, Jack Schannep, who gave a “sell” signal Friday. Hulbert notes that the Transports Index have been “breaking down in a big way” and that it peaked at an all-time high last month. Thus, he concludes: “Insofar as the index continues to be a reliable leading indicator . . . the economy and stock market may be living on borrowed time.”
Mark Hulbert writes in MarketWatch that “all of [the small-cap] sector’s much-vaulted historical relative strength has come at the end of December and early January,” as reflected in the monthly average outperformance of small-caps vs. large-caps 1926-2015. According to Dartmouth professor Ken French, small-caps usually hit a low around December 20, followed by the highest yields in January. The long-term outperformance by small caps is 2.2%, according to Ibbotson data. French’s day-by-day analysis suggests, however, that from late December to end of January the return is an average of 2.5%. Hulbert reminds investors that these are averages over 89 years for thousands of stocks, so “to bet on small-cap strength, you therefore need to diversify across many issues.”