Stock market newsletter editors as a crowd are a contrarian signal. Popular metrics like the Hulbert Stock Newsletter Sentiment index and ChartCraft’s Investors Intelligence Advisor Sentiment index measure the bullish/bearish bias in order to provide for such contrarian signals.
But among the crowd a few are actually quite good at finding major inflection points. Among this small handful, I count James Stack of InvesTech as one of the best. He was one of the few to turn positive at the 2008 bear market low and ride the cyclical bull market.
Currently he is skeptical that the bull market is over. One of the reasons he cites is a proprietary indicator that he calls “Negative Leadership Composite”. It purports to measure the strength of distribution in stocks and therefore is an early warning signal of an impending bear market.
Currently, despite the price weakness, there is no Negative Leadership whatsoever:
Compare and contrast this to July 2007 when the Negative Leadership Composite started to flash an early warning signal just months before the double top in October 2007.
Here’s what Stack wrote in late July 2007:
The most dramatic change in technical indicators has come in new bearish distribution in our Negative Leadership Composite indicator. Falling from zero to -24 in two days is a big move, equaled on only three instances in the past 40 years. The sharp increase in the number of stocks hitting new 12-month lows reveals that this sell-off is not just profit taking (in which case, only the new highs would decrease). Institutions are starting to batten down the hatches and employ bear market defenses–which is a little difficult when you’re managing tens or hundreds of billions of dollars.