Market Timers Get More Optimistic
It’s time for a change of heart on the stock market, say some investment newsletter writers who have wisely sat out the last year or more.
Their shift in advice may have brought thousands of individual investors back into the market in recent weeks. It also is rekindling the debate over the merits of such timing strategies.
Among the widely followed stock newsletter editors who have turned bullish are Bob Brinker of the Marketimer letter in Henderson, Nev., and Dan Sullivan of the Chartist newsletter in Seal Beach.
Professional market timers balk at the idea of buy-and-hold investing through good markets and bad. Instead, they seek to ride bull markets and avoid bear declines by making timing calls based on signals from models they devise -- which might include chart patterns of market indexes, for example, and interest rate trends.
Many financial planners view timing strategies with skepticism, saying adherents can miss the big gains that often come suddenly in the stock market -- sometimes over a period of a few days, before many timing models can turn positive.
Still, timers often have loyal followings. And more of these services have turned bullish on the market over the last month as Wall Street initially rallied with the onset of the war in Iraq, according to Mark Hulbert, editor of the Hulbert Financial Digest in Annandale, Va., which tracks investment letters.
Other newsletters that have become more optimistic on the market include On the Money, No Load Mutual Fund Selections & Timing, Index Rx, Todd Market Forecast and P.Q. Wall’s On-Line Forecast, Hulbert said.
On March 10, model portfolios in Hulbert’s index of 50 timers had average stock market exposure of minus 19%. A negative reading indicates many of the timers were advocating “shorting,” or betting on lower share prices.
By Friday the average market exposure was 46%. Hulbert said the one-month swing in the index was the sharpest he could remember.
Brinker and Sullivan rank as two of the most accurate market timers by Hulbert’s tally. Of newsletters with a 10-year performance history, Brinker’s Marketimer ranks 10th of 72 letters. Of timing services with a 20-year history, Sullivan’s Chartist ranks 4th of 21, Hulbert said.
Brinker issued a buy signal March 11, after being bearish since January 2000. His decision to exit when he did -- two months before the bull market peak -- helped followers avoid much of the portfolio damage of the last three years.
Before his January 2000 call, Brinker had been “unambiguously bullish” through the 1990s, Hulbert said.
This time, Brinker caught the prewar bottom in the Dow Jones industrials, which closed at 7,524 on March 11. At 8,203.41 on Friday, the Dow is up 9% since then.
Brinker, whose service costs $185 a year and who also hosts a weekly personal-finance radio show heard nationwide, said he believes that the market in March began a “cyclical” bull move that will last one to three years. He advised his most aggressive clients to change their portfolios from 65% cash/35% stocks to 100% stocks.
He said he made that call based on his analysis of market index chart patterns and his fundamental view of the economy.
But the longer-term outlook isn’t upbeat, Brinker said.
“It’s my view that we ended the mother of secular bull markets in the first quarter of 2000 after almost 18 years,” he said in an interview.
Now, the market faces a “secular bear” period that could last from eight to 20 years, Brinker said, with alternating bull and bear cycles within it.
Lance Fogan, a retired doctor who lives in Valencia, said he has been following Brinker’s advice for 10 years.
In 2000, when Brinker advised exiting the market, Fogan said he shifted his portfolio to about 75% cash accounts and bonds, leaving about 25% in stocks. “He did right by me,” Fogan said.
When Brinker made his March call to increase portfolio stock weightings, Fogan says he was apprehensive. “I’m not that confident about the economy,” he said. But he followed the advice and increased his stock allocation, he said, because of Brinker’s long-term record.
Sullivan, who said his $175-a-year newsletter has 6,500 subscribers, turned more positive on stocks Wednesday. He had been out of the market since February 2002.
In his latest call he advised clients to deploy half their cash reserves across 16 individual stocks, and leave the other half in cash.
Despite his longer-term record, Sullivan said the market has confounded his timing calls several times during the last three years. “It’s been rough,” he said. “The volatility just chewed me up in 2000 and 2001.”
As a consequence, Sullivan said he has tweaked his timing models in the last year or so. Rather than use major index performance and interest rate trends to make broad market calls, Sullivan said he is focusing on stocks with strong momentum, analyzing their chart trends and making buy and sell decisions based on their individual merits.
“These stocks have resisted the downside bias over the last year -- they’re in their own private bull markets,” he said. “I’ve gone back to what originally worked for me.”
What prompted him to jump halfway back into the market last week, Sullivan said, was that hot stocks were holding their momentum rather than faltering and giving way to new leaders. The names he recommended include EBay Inc., Avon Products Inc. and brokerage Bear Stearns Cos.
Some market timers still are steering clear of stocks.
Doug Fabian, editor of Successful Investing, a Huntington Beach-based newsletter with 17,000 subscribers, said he has been bearish since February 2002 -- and unlike Brinker and Sullivan, he is staying that way.
If anything, Fabian may shift from all cash to a “short” position by recommending bearish-strategy funds, he said.
Fabian believes that the market’s gains of the last month won’t last. He noted that the Dow fell 0.9% last week despite good news on several fronts, including the war in Iraq, lower oil prices, a robust March retail sales report and rising consumer confidence.
“If the market can’t rally with that much good news, when can it? This does not bode well for stocks,” he said.
He warned that key market indexes could fall substantially below the multiyear lows they reached in October, in part because more investors have jumped back into stocks lately -- which means there are more people who could throw in the towel if share prices crumble.
“Listening to the parade of talking heads on CNBC, everybody is like, ‘You’ve got to be in this market,’ ” Fabian said.
Typically at bear-market bottoms, investor sentiment is far bleaker than it has been lately, he said, adding that his bullish timer peers are simply too early.
*
Staff writer Tom Petruno contributed to this report.
