QQQ - Investor Outlook - Hulbert Surveys Indicate Market Caution Short Term

2023-07-11 08:01:02 ET

Summary

• The Hulbert sentiment surveys indicate market caution over the next two or three months, in contrast to the bullish sentiment in December last year.
• The surveys, which monitor the bullish or bearish opinions of newsletter writers, show a shift in investor sentiment to bullish extremes after an eight-month rally.
• The surveys suggest a potential short-term market correction of 5% to 7%, advising investors to avoid further investment and to possibly reduce current positions to 80%.

The Investor Outlook series focuses on specific indicators that measure what investors are thinking and doing about the market. This article looks at the two Hulbert sentiment surveys.

The two Hulbert Surveys

Two Hulbert surveys are pointing to market caution over the short term, which means the next two months. This is the exact opposite of last December when we wrote this bullish article based on the survey s : "Two Hulbert Newsletter Writer Surveys Point To A Better Stock Market."

The December article's summary points stated:

• Mark Hulbert has been tracking newsletter writers' performance since 1980, separating wheat from the chaff and bringing honesty to an often-slippery field.
• His surveys are used in our two Master Sentiment Indicators and in our opinion, they are both signaling higher prices ahead.

The December article contains an explanation of the two surveys, but they essentially monitor the bullish or bearish opinions of newsletter writers, both for the overall stock market and NASDAQ.

Mark Hulbert has been doing this since 1980. He discovered that when too many writers were bullish, a market decline soon follows - and vice versa. So, the survey acts as a contrary opinion indicator.

At the Sentiment King we take his daily readings and smooth them out using a time weighted moving average. The average is approximately equal to a seven day moving average, so it's relatively short term. Then we plot the results on our Sentiment King ranking scale. It's graphed below against the SPY.

As you can see, expectations swing back and forth rather rapidly between the red and the green zones.

Red zone readings indicate extreme bullish sentiment, while green zone readings represent extreme bearish sentiment. It was green zone readings last summer and in October that prompted the bullish article we wrote on December 30th.

The Situation Has Reversed

Now, the situation has reversed. After an eight month rally, our ranking of the survey is finally showing a movement of sentiment into the red zone.

We've indicated with red arrows past moments when our interpretation of the Hulbert survey also reached these extreme levels. Not all resulted in short-term market declines, but a significant number did.

The next chart shows the NASDAQ survey plotted against the QQQ.

As you can see, this survey has just barely entered the red zone. We've also indicated with red arrows, red zone readings in the recent past. Many, but not all, represented at short term peaks in the price of QQQ. It should be noted that two occurred just prior to major market declines.

Conclusion

There is no doubt that investor sentiment has switched from last year's bearish extremes and is now, after an eight month rally, reaching bullish extremes. However, we don't think this means last year's, long-term buy signal is over.

But we do think these readings indicate the market could experience a short term correction of at least a month or two, and a decline of 5% to 7%.

Because of this we don't think investors should put any more money into this market, and that those who are 100% invested should lighten their position to 80%.

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