Newsletter Sentiment: It's the Degree of Agreement That Counts

by Mark Hulbert

Many contrarians for a number of decades have been basing their market-timing judgments on the consensus opinion of investment newsletter editors. They claim great success by turning bearish whenever that consensus reaches bullish extremes—and turning bullish as it reaches a bearish extreme.

Nevertheless, academic researchers have been unable to discover any statistical significance to market timing systems based on such data. The most comprehensive study, by Duke University’s John Graham and Campbell Harvey (“Market Timing Ability and Volatility Implied in Investment Newsletters’ Asset Allocation Recommendations,” Journal of Financial Economics, 1996), was unable to locate any mechanical decision rule based on the consensus newsletter recommendation that beat a buy and hold.

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Recently, however, researchers have discovered another way of using newsletter sentiment data that does appear to have statistical significance. Rather than concentrate on the average recommendation among all newsletter editors, this new research has focused on the degree of dispersion among their various recommendations. This dispersion appears to be correlated with any of several market phenomena.

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