Short-term stock-market timers on balance have not yet thrown in the towel on their optimism about the market. This suggests the market must fall further before a tradable bottom appears.
It is surprising that the market timing community hasn’t become more pessimistic. It was perhaps understandable earlier this week when the timers were relatively sanguine in the wake of failures of smaller banks like Silicon Valley Bank and Signature Bank Their failures weren’t as obvious a threat to the global financial system, but Credit Suisse’s woes constitute a far bigger threat.
The broad market averages certainly reflected that panic. The Dow Jones Industrial Average was down more than 2% in midday trading Thursday. Yet the nearly 100 short-term timers my firm monitors appeared, on balance, to barely notice.
Consider their average recommended equity exposure, as measured by my firm’s two sentiment indices. The first, the Hulbert Stock Newsletter Sentiment Index (HSNSI) reflects the average recommended equity exposure among timers who focus on the broad stock market. The second, the Hulbert Nasdaq Newsletter Sentiment Index (HNNSI), reflects the average among timers who focus on the Nasdaq market in particular. As of noon Eastern time on Thursday, the first of these two averages was a miniscule 1.9 percentage points down from where it was Wednesday evening. The second had fallen only slightly more, 6.5 percentage points.
Those modest reductions are hardly the stuff of panic. A similar conclusion is reached when realizing that these sentiment indices have not dropped into the lowest 10% of their two-decade distributions. In prior columns I have used those lowest deciles to define the zones of extreme bearishness — zones that contrarians consider a prerequisite for any decent rally. The HSNSI currently stands at the 12th percentile of its distribution since 2000, while the HNNSI is at the 22nd percentile of its distribution.
If the market were to attempt a rally from current sentiment levels, contrarians would bet that it won’t last long or go far.
If history is any guide, the current decline won’t hit bottom until both of these sentiment indices drop into their bottom deciles and stay there for more than just a day or two.
That’s what happened last October, when the HSNSI and the HNNSI had both been in their bottom deciles for more than 90% of the trading sessions over the trailing month. Contrarians were therefore not surprised by the strength of the subsequent rally, in which the Nasdaq Composite on an intraday basis rose more than 20% — possibly satisfying the semi-official definition of a new bull market.
Unfortunately, the current sentiment picture is far different than what prevailed in October 2022. This doesn’t guarantee that a rally won’t occur. But if the market were to attempt a rally from current sentiment levels, contrarians would bet that it won’t last long or go far.
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 firstname.lastname@example.org