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Tuesday, September 30, 2014 9:06:50 AM
Wait for one more bounce in stocks before a broad decline
By Mark Hulbert
* September 30, 2014
Investor sentiment has soured so fast, a rebound is likely
CHAPEL HILL, N.C. (MarketWatch) — Investors’ mood has quickly soured in recent days, potentially setting up the stock market for a short-term bounce.
That doesn’t mean the bull market is alive and well, I hasten to add. As I’ve written in recent columns, the market actually has several serious strikes against it right now.
But, as a contrarian, I get uneasy when too many begin to agree. And over the past week or so, there has been nothing short of a mad rush to the exits among retail-oriented investment advisers. That, in turn, suggests the market is due for some short-term strength, even if its longer-term trend is one of decline.
Consider the average recommended equity exposure among a subset of Nasdaq-oriented market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI). Since the Nasdaq market responds especially quickly to changes in retail investors’ mood, and because those timers themselves are quick to shift their recommended exposure levels, the HNNSI is our most sensitive barometer of investor sentiment.
Since the NASDAQ Composite COMP, -0.14% hit its all-time high, Sept. 19, just six trading sessions ago, the HNNSI has dropped an incredible 75.5 percentage points—from 68.8% then to minus 6.7% today. In other words, the typical NASDAQ-oriented market timer has shifted from being substantially invested on the long side to slightly short.
That remarkable shift is just the opposite of the stubbornly held bullishness that is typically seen in major tops.
For a textbook illustration of that kind of bullishness, consider what happened as the 2000-2002 bear market was beginning — at the top of the Internet bubble. Three weeks after the Nasdaq Composite hit its all-time high on March 10, 2000, the index was more than 18% lower — almost enough to satisfy the unofficial definition of a bear market.
And, yet, the HNNSI over those three weeks actually rose.
In other words, the typical Nasdaq-oriented market timer in March 2000 treated a decline of close to bear-market-proportions as a buying opportunity. That was simply amazing, which is why contrarians were not surprised in the least by the carnage the Nasdaq Composite subsequently suffered. By the end of the year 2000, it was 52% below its March high.
Today, in contrast, the Nasdaq-oriented market timers I monitor are treating the decline as the opposite of a buying opportunity. Even though the Nasdaq Composite closed Monday only 2.3% lower than its intra-day high on Sept. 19, those market timers, on average, have now not only eliminated all their long positions but are now slightly short the stock market.
Bear markets like to descend a so-called slope of hope, just as bull markets like to climb a wall of worry. So even if the stock market is in a topping-out process now, odds are good that investors’ mood will brighten first before a major leg down begins in earnest.
http://www.marketwatch.com/story/wait-for-one-more-bounce-in-stocks-before-a-broad-decline-2014-09-30?dist=beforebell
George.
By Mark Hulbert
* September 30, 2014
Investor sentiment has soured so fast, a rebound is likely
CHAPEL HILL, N.C. (MarketWatch) — Investors’ mood has quickly soured in recent days, potentially setting up the stock market for a short-term bounce.
That doesn’t mean the bull market is alive and well, I hasten to add. As I’ve written in recent columns, the market actually has several serious strikes against it right now.
But, as a contrarian, I get uneasy when too many begin to agree. And over the past week or so, there has been nothing short of a mad rush to the exits among retail-oriented investment advisers. That, in turn, suggests the market is due for some short-term strength, even if its longer-term trend is one of decline.
Consider the average recommended equity exposure among a subset of Nasdaq-oriented market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI). Since the Nasdaq market responds especially quickly to changes in retail investors’ mood, and because those timers themselves are quick to shift their recommended exposure levels, the HNNSI is our most sensitive barometer of investor sentiment.
Since the NASDAQ Composite COMP, -0.14% hit its all-time high, Sept. 19, just six trading sessions ago, the HNNSI has dropped an incredible 75.5 percentage points—from 68.8% then to minus 6.7% today. In other words, the typical NASDAQ-oriented market timer has shifted from being substantially invested on the long side to slightly short.
That remarkable shift is just the opposite of the stubbornly held bullishness that is typically seen in major tops.
For a textbook illustration of that kind of bullishness, consider what happened as the 2000-2002 bear market was beginning — at the top of the Internet bubble. Three weeks after the Nasdaq Composite hit its all-time high on March 10, 2000, the index was more than 18% lower — almost enough to satisfy the unofficial definition of a bear market.
And, yet, the HNNSI over those three weeks actually rose.
In other words, the typical Nasdaq-oriented market timer in March 2000 treated a decline of close to bear-market-proportions as a buying opportunity. That was simply amazing, which is why contrarians were not surprised in the least by the carnage the Nasdaq Composite subsequently suffered. By the end of the year 2000, it was 52% below its March high.
Today, in contrast, the Nasdaq-oriented market timers I monitor are treating the decline as the opposite of a buying opportunity. Even though the Nasdaq Composite closed Monday only 2.3% lower than its intra-day high on Sept. 19, those market timers, on average, have now not only eliminated all their long positions but are now slightly short the stock market.
Bear markets like to descend a so-called slope of hope, just as bull markets like to climb a wall of worry. So even if the stock market is in a topping-out process now, odds are good that investors’ mood will brighten first before a major leg down begins in earnest.
http://www.marketwatch.com/story/wait-for-one-more-bounce-in-stocks-before-a-broad-decline-2014-09-30?dist=beforebell
George.
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