The best vs. the rest [¹]
Top letters did good job anticipating popping of Internet bubble

By Mark Hulbert, MarketWatch | 22 October 2007

ANNANDALE, Va. (MarketWatch)— The newsletters with the best long-term market timing records at the top of the market in March 2000 were not completely out of stocks. But, on balance, they were far less caught up than the typical adviser in the hype and hysteria that led to the Internet bubble. And, of particular relevance to today's market, their average recommended equity exposure then was markedly lower than it is today.

I was prompted to report these comparisons by a number of you who responded to my Oct. 5 column, in which I reported that there was not one bear among the newsletters whose market timing advice sported the best 10-year risk-adjusted performances. See Oct. 5 column

This is all well and good, many of you argued. But what would the conclusion have been of a similar analysis conducted at the March 2000 stock market high? We would be able to draw little comfort from the top timers' current bullishness if they were just as optimistic immediately prior to the Internet bubble bursting.

They weren't.

To find out, I determined which market timing newsletters would have emerged in March 2000 upon applying the same criteria used in my Oct. 5 column. In other words, I was looking for the 10 services whose market timing advice had the best risk-adjusted returns over the 10 years ending in March 2000. However, because only five of these 10 newsletters were actually ahead of a buy-and-hold strategy over the trailing 10 years, I confined my group to just these five.

(My decision to do so is not a case of Monday-morning quarterbacking, by the way. I advocated just such an approach in the March 2000 issue of my newsletter, since it makes little sense to base a consensus forecast on market timers who have failed to do as well as simply buying and holding. Today, in contrast, all 10 of the top market timing newsletters are well ahead of a buy-and-hold.)

Two of the five market-beating newsletters in March 2000 were outright bearish on the stock market, and a third was only moderately bullish; the remaining two were bullish. The average recommended equity exposure among the five was just 40% in March 2000. Not bad.

Not bad.

In contrast, the current average recommended exposure among the top market timing newsletters is more than twice as high, at 86%.

Another telling contrast comes from comparing the top market timers with all the other newsletters that the Hulbert Financial Digest monitors. In March 2000, the average recommended equity exposure among all monitored newsletters was 68%, 28 percentage points higher than the average among the top timers.

So the best were far less bullish than the rest.

Today, in contrast, the average recommended exposure among all monitored newsletters is 64%, or 22 percentage points less than the average among the very best timers. So the best are now far more bullish than the rest.

The bottom line? The top timers' current bullishness is something deserving of our serious consideration.

Normxxx    
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