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Stock market weakness is likely to persist as extreme bullishness fades

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Contrarians weren’t surprised the stock market fell this week. They think more weakness is in store.

That’s because short-term stock market timers recently became more bullish than at almost any other time since data began being collected in 2000. In the past, the stock market has reliably struggled in the wake of bullishness this extreme.

Bear this in mind as you read the myriad reasons that commentators are giving for why the stock market is falling. Among the most-cited are the spike in coronavirus cases in Europe and the absence of a new stimulus program out of Washington. Notice, however, that none of those factors is new; they therefore can’t explain why the stock market is struggling now.

To put the timers’ current exuberance in perspective, consider the Hulbert Stock Newsletter Sentiment Index (HSNSI), which reflects their average recommended equity exposure. Since 2000, 99% of the HSNSI’s daily readings have been lower than where it stands today.

As you can see from the accompanying chart, above, this puts the latest HSNSI reading well inside the zone that some contrarians consider to represent extreme bullishness.

Today’s sentiment is at the opposite extreme of what prevailed just one month ago. Then, as you might recall, I reported that the HSNSI had fallen into the “extreme pessimism” zone and that, as a result, contrarians were expecting the market to rally. At its high earlier this week, the Dow Jones Industrial Average
DJIA,
-0.34%

 was more than 1,500 points higher than where it stood when that month-ago column was published.

To illustrate this contrarian perspective on stock market timer sentiment, consider the performance of the Russell 2000 Index
RUT,
+0.04%

 in the wake of past periods of excessive bullishness or bearishness. The table below reflects data since 2000, which is when my firm started calculating the HSNSI on a daily basis.

I chose the Russell 2000 to illustrate the impact of market sentiment based on research conducted by Malcolm Baker of Harvard Business School and Jeffrey Wurgler of New York University. They found that “stocks of low-capitalization, younger, unprofitable, high-volatility, non-dividend paying growth companies … are likely to be disproportionately sensitive to broad waves of investor sentiment.”

That, of course, is a good description of the companies in the Russell 2000.

Subsequent to extreme bullish sentiment (HSNSI readings in top 10% of historical distribution)

Subsequent to extreme bearish sentiment (HSNSI readings in bottom 10% of historical distribution)

Russell 2000 over subsequent one month

-0.8%

+1.4%

Russell 2000 over subsequent two months

-1.3%

+3.7%

Russell 2000 over subsequent three months

-2.8%

+5.1%

The extent and duration of market weakness in coming days depends, according to contrarian analysis, on how quickly the market timers retreat to the bearish camp. If they stubbornly hold on to their current excessive bullishness, then a longer and deeper decline will be necessary to rebuild the so-called “wall of worry” that contrarians tell us that bull markets like to climb.

In contrast, if the market timers quickly jump on the bearish bandwagon, then the market’s impressive rally may resume in relatively short order. I note in this regard how quickly sentiment about Fastly turned negative over the past 24 hours, causing the stock
FSLY,
-27.33%

 to lose a quarter of its value.

Contrarians believe there is no reason to try guessing which is which, and argue instead that we can let the sentiment data tell the story. We will know soon enough.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.



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‘I could live on my Social Security and still save money’: This 66-year-old left Chicago for ‘calming’ Costa Rica — where he now plans to live indefinitely

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Editor’s note: This article was first published in September 2019.

A school break changed 66-year-old Martin Farber’s life forever.

In 2007, his daughter — who at the time was attending Illinois State University — decided she wanted to spend a college holiday volunteering in Costa Rica and staying with a local family, he explains. She came home raving about the experience, so, in 2008, Farber — who at the time was living in Evanston, Ill., just outside Chicago, and selling cars — took his first trip there.

“It was a big surprise to me — bumpy roads, dogs barking in the streets,” he says. “I wasn’t enamored at first.”

But as his daughter began traveling there more and eventually moved there for a year, he took additional trips to Costa Rica. It quickly grew on him — in particular, the people. “The Costa Rican people are warm, open and friendly. I felt less invisible in a strange country in a strange town where I didn’t speak the language than I did in Evanston.”

And the more time he spent there, the more it impacted him: “On one of my trips there, I thought: My daughter’s life makes more sense than mine,” he says. “There was nothing wrong with my life, but I felt that my life was out of context with who I’d become. … I would have bills and make money to pay them, but that had ceased to be satisfying,” he recalls. “I knew I needed to change my life — there was no more joy in what I was doing.”

What’s more, when he’d return from his Costa Rica trips, people noticed. “I would come back, and my friends and therapist would say: You seem better after you go,” he says with a laugh.

A view from the hot springs near Martin Farber’s home in Costa Rica.


Martin Farber

So in 2014, he packed up and moved to Orosi — a picturesque, lush small town with waterfalls and hot springs a little over an hour’s drive from San Jose — promising himself he’d stay for two years. It’s been five, and he now plans to stay in Costa Rica indefinitely. (Though Farber notes that, to him, “it’s not a retirement; it’s a chance to lead a new and different life.”)

Here’s what his life is like, from costs to health care to residency to everyday life:

The cost: While many expats spend way more living in Costa Rica, Farber says: “I could live on my Social Security and still save money.” He says “a person can live on $1,200 per month, two people on $2,000.” The key, he says, is to live more like he does and as the Costa Ricans do — in a modest home, eating local food and purchasing local goods.

Indeed, Farber himself spends just $300 a month for rent (he rents a home from a friend who moved recently and gave him a good deal), roughly $225 a month on groceries and just $50 a month total on water and electricity (the temperate climate in Orosi means you rarely need heat or air conditioning). The veteran Volkswagen
VOW,
+0.96%

 
VLKAF,
+0.98%

salesman saves money by not owning a car (those over 65 ride municipal buses for free), which can be a significant expense in Costa Rica; for his cellphone, “I pay as I go … roughly $10 may last me a couple weeks or more,” he says, adding that “many people handle there their cellphones this way. You can get them recharged anywhere.”

His major expense is travel: He goes back to the U.S. to visit his mother in Florida several times a year and lately has spent part of the summer in Chicago helping out a friend with a dealership there. He also spends a good amount of money on health care. He says that while flights can be had for as little as $350 roundtrip during offseasons, the cost can be much higher the rest of the year.

In the saddle.


Martin Farber

Health care: Farber, who has permanent resident status in Costa Rica, says he pays about $90 per month to participate in the country’s health-care system — adding that the health care he’s received has been very good. (A 2018 study of health-care quality and access in more than 190 nations ranked Costa Rica No. 62.)

When he developed a detached retina, though, he paid for the procedure out of pocket so that he didn’t have to wait for the required surgery, he says — adding that the entire procedure cost him about $5,000. “I would have had to have waited four days,” he says, if he had not paid to expedite matters. “That might have been fine, but it might not.” And he adds that the quality of care depends on where you get it in the country.

Lifestyle: Though Farber says that he “moved here with no goals and no agenda,” he’s found plenty to do. “I take Spanish lessons two days a week for two hours a day. It’s been great. I never thought I would acquire a usable language in my 60s,” he says. He also rides his bike all around the area, does some writing and belongs to a community group that undertakes projects to improve the area.

And he often simply takes in nature, which he says has been an essential part of why he feels calmer and more relaxed in Costa Rica than in the U.S. “I live at 3,000 feet but in a valley surrounded by coffee fields and lime trees and water. At night, if I open the windows, I can hear the river rushing by,” he says. “It is very calming … hundreds of trees everywhere … you know the Earth is alive.”

The historic Iglesia de San José de Orosi.


iStock

Cons: “I don’t want to overglorify. It’s not without its problems,” Farber says of Costa Rica. “There are social problems and downsides.” He notes that crime and petty theft can be a problem (“I am cautious,” he says of his approach) and seem to have increased since he moved there, and adds that he misses out on some cultural things because of where he lives. And, he says with a laugh, “I can’t order Thai food at 9 at night.” But, he adds: “These are trade-offs — in the afternoon, I get to walk in the coffee fields and see flocks of parrots.”

Residency: To qualify for Costa Rica’s pensionado visa, expats must prove that they have a pension of at least $1,000 coming in each month. (Here are the details of that program.) Once you have lived in Costa Rica for three years, you can apply for permanent residency. Farber used a lawyer to help him figure out the ins and outs of residency options; his entire path to permanent residency took about a year, he says.

The bottom line: “After five years I am still amazed and surprised that I made the decision to lead a life I never thought I would,” he says. And while he may not stay in Orosi forever — “the town doesn’t have an ambulance, [and] I don’t know what it will be like to be 80 there,” he says — he does plan to stay in Costa Rica in no small part because of the people and sense of community. “I have the feeling that life is good here,” he says. “It’s hard sometimes, but we are all in it together.”



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