Hulbert: Buyer Beware

Stocks have been bouncing back strong from their August troubles, but Mark Hulbert says the tone of the rally isn’t a good one.

“Nothing so well illustrates Wall Street’s dangerously exuberant state of mind as its triple-digit rally in the wake of Larry Summers withdrawing from consideration to be the next Federal Reserve chairman,” Hulbert writes in a MarketWatch column. “Do you really believe the outlook for corporate earnings suddenly became much brighter just because Summers is no longer in the running to succeed Ben Bernanke?”

Hulbert says the Summers bounce is just one example of the stock market shrugging off bad news with little or no losses — and then “bouncing back” as though there actually had been a big decline. “According to contrarian analysis, this sentiment situation is at the opposite end of the spectrum from the wall of worry that bull markets like to climb,” he says. “It’s more akin to the slope of hope that bear markets like to descend.”

Hulbert notes that the average recommended equity exposure among the short term market timing newsletters he tracks is 56.6%, according to the Hulbert Stock Newsletter Sentiment Index — 45 percentage points higher than it was in late August. Such a big jump in such a short period is a concern, he says. He thinks the market is being driven more by mood than fundamentals, and says investors could be in for a rude awakening when the collective mood sours.