By Mark Hulbert, MarketWatch
ANNANDALE, Va. (MarketWatch) — It’s now official.
January was a down month for the stock market, thereby triggering a sell signal from the venerable January Barometer — which holds that the market’s direction for the rest of the year will be the same as it was during January. Does that mean you should give up on making any money in the stock market during February and simply go to cash? Not necessarily.
A group of market-beating stock market timers I track are mostly bullish about the stock market’s prospects. By no means are they giving up on the stock market.
To construct this group of top market timers, I required them to jump over three hurdles. It would have been noteworthy enough to have cleared any one of these hurdles. But jumping over all three is an impressive achievement, which is why it behooves us to pay attention to the market forecasts of those who were able to do so.
The three hurdles were:
- Market timing performance ahead of a buy-and-hold on a risk-adjusted basis during the 2002-2007 bull market
- Market timing performance ahead of a buy-and-hold on a risk-adjusted basis during the 2007-2009 bear market
- Market timing performance ahead of a buy-and-hold on a risk-adjusted basis over the entire ten-year period through the end of 2009
Seven advisory services were able to jump over all of these hurdles, though two are edited by the same advisor. In what follows I provide a quick summary (in alphabetical order) of what these six advisers currently are saying about the stock market:
- Blue Chip Investor (Stephen Check) — Bullish. To be sure, Check is not a short-term market timer. But he does vary the amount of cash in his newsletter’s model portfolio, and currently he has allocated just 0.6% to cash; for all intents and purposes, it is fully invested. Furthermore, Check maintains a market timing model based on the difference between the stock market’s P/E ratio and the yield on triple-A rated corporate bonds. As of the end of January, that model rated the stock market as being “undervalued,” though not “extremely undervalued” as it was one year ago.
- Bob Brinker’s Marketimer (Robert Brinker) — Bullish. In his latest issue, in which he reported that his market timing model is bullish and his model portfolios are fully invested, Brinker wrote: “Our indicators suggest that a new cyclical bear market decline in excess of 20% is not likely to begin during the winter season. While it is true that cyclical bull market corrections can occur at any time, we would regard any such pullback as a health restoring event if it were to occur in the weeks ahead. Cyclical bull market corrections are usually contained with a range of five to ten percent, and are followed by significant rallies to new cyclical bull market highs.”
- The Chartist & The Chartist Mutual Fund Letter (Dan Sullivan) — Bullish. In his latest issue, in which Sullivan reported that he is recommending that his followers be fully invested in the stock market, he acknowledged that investors aren’t very optimistic about what 2010 has in store, “given the preponderance of adverse news and the fact that so many of their friends are out of work. It is not a pretty sight out there.” But he reminded us that, “over the past 100 years, the stock market has had the most accurate record of predicting the direction of the economy. Robert Rhea of Dow Theory fame said it all a long time ago, ‘The fluctuations of the daily closing prices of the Dow Jones rail and industrial averages afford a composite index of all the hopes, disappointments, and knowledge of everyone who knows anything of financial matters, and for that reason, the effects of coming events (excluding acts of God) are always properly anticipated in their movement.’ Granted, the stock market does not always get it right, but its overall record as a predictor of the economy is unequaled.”
- Fidelity Independent Adviser (Donald Dion) — Bullish. Dion does not hazard a prediction about the stock market’s trend for all of 2010, preferring instead to write that the year will test the stock market’s “strength and stamina.” In the meantime, however, Dion is keeping his equity-oriented model portfolios fully invested.
- Fidelity Sector Investor (James Lowell) — Bullish. Though Lowell continues to believe the stock market will register a gain for the year, he reiterated in his latest letter his belief “that a 10% to 15% profit-taking correction remains in store for investors this year. I’d rather have it sooner rather than later.” He nevertheless is keeping 86% of his so-called “Market Masters Portfolio” invested in various Fidelity sector funds, with the remaining 14% is invested in a foreign stock fund.
- Independent Adviser for Vanguard Investors (Dan Wiener) — Bullish. In his latest issue, Wiener wrote: “The coming year holds promise. Economic indicators are suggesting the worst is not only behind us, but that there are further gains to be made as we recover. While the pessimists will say we’ve come too far, too fast, and are headed for a brick wall, I would offer a different view: Because we have been recovering from almost historic lows, we’ve barely begun to get back to even a semblance of what normal looks like. The brick wall is the classic ‘wall of worry’ that bull markets climb against the backdrop of mixed or negative readings.” Wiener’s two growth-oriented model portfolios are 82% invested in domestic equities, on average, with an additional 10% allocated to international stocks.
In summary: All six advisers are bullish, with an average recommended domestic equity exposure of 95%.
Before you throw caution to the winds, however, note carefully that these top-performing market timers are by no means betting aggressively that the stock market will rise in February. In fact, the five mutual funds that currently are recommended by two or more of these advisers are quite conservative:
- Fidelity Latin America (FLATX 46.93, -0.61, -1.28%)
- Fidelity Select Multimedia (FBMPX 32.49, -0.08, -0.25%)
- Fidelity Select Technology (FSPTX 68.73, -1.70, -2.41%)
- Vanguard Intl Growth (VWIGX 16.13, -0.12, -0.74%)
- Vanguard Short-Term Investment Grade (VFSTX 10.70, +0.01, +0.09%)
The bottom line: These top performers think the outlook is bright, but don’t get carried away.
Hulbert does not hold a position in any of the investments mentioned in this column.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.