Wall Street traders now are highly polarized — just like they were at the February 2020 market top

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OPINION: Polarization is toxic on Wall Street, too. The U.S. stock market now is at a very high-risk juncture, Mark Hulbert writes.

Polarization isn’t toxic only in politics; it is on Wall Street as well. That’s worrisome, since disagreement about the U.S. stock market is wider than usual right now.

It’s not just our imagination that these and other market timers are more polarized than normal. To show this, I analyzed the HFD’s database containing the recommended equity exposure levels of nearly 100 stock market timing newsletters dating back more than four decades. As measured by the standard deviation of these exposure levels, the dispersion of their recommendations is wider than average now.

To illustrate the market timing significance of the dispersion of market timer opinions, consider that one of its lowest levels over the last couple of years was in December 2019. The S&P 500 rose 5% over the next six weeks. By the time the stock market reached its high in February 2020, this dispersion had nearly doubled and was well-above average.

Yes and no. While the uncertainty about who would win the election has passed, it has been replaced by other uncertainties that previously were not on most investors’ radar screens.

The 7-day moving average of the U.S. version of this index did fall immediately after Joe Biden was declared the winner of the presidential election. But since then it has moved up and on several occasions has been higher than where it stood at the end of October. Monthly values of this index are plotted in the chart below:

 

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