Market Direction and Stock Trends

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>>> The bull market in U.S. stocks lives another day
By: Mark Hulbert | November 16, 2017

Market timers ran for the exits this week, a contrarian sign of a healthy equity market

CHAPEL HILL, N.C. (MarketWatch) — The bull market is alive and well.

That’s the conclusion contrarians have reached after watching market timers react to the U.S. stock market’s pullback this week. Rather than remain stubbornly bullish, which is the hallmark of a major top, many of those timers quickly ran for the exits.

Contrarians have been waiting for a pullback to get a more accurate read of market sentiment. That’s because it’s harder to get a read when the stock market is successively hitting new highs, as it has done in recent months. During happy times, many will pay lip service to being bullish but not really mean it. The only way to know for sure is to see how they react when the market stumbles.

Now we know.

Consider the average recommended stock market exposure level among a subset of short-term market timers I monitor (as measured by the Hulbert Stock Newsletter Sentiment Index). This average currently stands at 44.1%, down from a high of 60.1% as recently as the end of October. That’s a strikingly large drop in bullishness, given that the Dow Jones Industrial Average DJIA, -0.33% is less than a half a percent lower today than at the end of last month.

Even starker is the drop in bullishness among stock market timers who focus on the Nasdaq stock market (as measured by the Hulbert Nasdaq Newsletter Sentiment Index). Their average exposure level now stands at 38.2%, half of its high level in October of 78.5%, even though the Nasdaq Composite Index COMP, -0.05% today is higher than where it stood when the Nasdaq timers were twice as bullish. (See accompanying chart, below.)



Assuming the future is like the past, the timers’ recent behavior is nothing like what we would be seeing if the market’s recent highs marked the all-time high of the bull market. At least from a contrarian perspective, therefore, the bull market’s final top is most likely still ahead of us.

To get an idea of when that top will be happening, pay close attention to how the timers react to market weakness. If they remain stubbornly bullish, then contrarians will suggest that we run for the hills.

To appreciate what stubbornly held bullishness looks like, consider how the Nasdaq-oriented timers responded in early 2000 to the internet bubble’s bursting. In just the first two weeks of that bubble’s deflation, the Nasdaq Composite fell by enough to satisfy the semi-official definition of a correction — more than 10%. And, yet, the Nasdaq-focused market timers treated it as a buying opportunity rather than as a reason to run scared. The HNNSI actually jumped by more than 30 percentage points over those two weeks.

That’s stubbornly held bullishness, and we all know what happened next.

For now, though, the average market timer is more eager to run for the exits than he is to remain stubbornly bullish. And that gives the bull market a continued lease on life.

By the way, this is the same conclusion contrarians reached in mid-September, the last time I devoted a column to stock market sentiment. The S&P 500 Index SPX, -0.13% has gained 4.5% since that column was published.

For the record, though, let me repeat the usual qualifications: Contrarian analysis doesn’t always work. And even when it does, it is at best a short-term market-timing tool. That’s because the market timers who so quickly turned bearish could just as quickly jump back on the bullish bandwagon — and become stubbornly so. My research has found that its greatest explanatory power is measured in weeks rather than years.

https://www.marketwatch.com/story/the-bull-market-in-us-stocks-lives-another-day-2017-11-16

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