Donald Trump has built a wall to keep stock bulls in the market By Mark Hulbert
* November 11, 2016
Investors’ wall of worry is stronger — and that’s good news
Donald Trump has built a big, beautiful wall — and that bodes well for the stock market’s near-term future.
I’m referring, of course, to the proverbial Wall of Worry on Wall Street. It’s just the kind of wall that bull markets like to climb.
Consider the average recommended equity exposure among a subset of short-term Nasdaq-oriented stock market timers who I monitor on a regular basis (as measured by the Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI). Since the Nasdaq COMP, +0.37% responds especially quickly to changes in investor mood, and because those timers are themselves quick to shift their recommended exposure levels, the HNNSI is my most sensitive barometer of investor sentiment.
As of the NYSE’s close of trading on Tuesday, before any election results were known, the HNNSI stood at minus 19.4%. That meant that the average Nasdaq-oriented adviser was allocating a fifth of his portfolio to shorting the market — an aggressive bet that the market would decline.
This was a surprising level of bearishness, given that the stock market had rallied strongly over the previous two trading sessions and stood within shouting distance of new all-time highs. Contrarians therefore were bullish.
They certainly got the last laugh on Wednesday, the first day of trading after Trump’s upset victory over Hillary Clinton. Though Dow futures were down as much as 800 points in pre-market trading, the benchmark DJIA, +0.00% ended up closing higher for the day by more than 250 points.
But the bullish short-term news doesn’t stop there: In the wake of Wednesday’s surprising rally, the HNNSI fell even further into negative territory — and now stands at minus 27.8%. As you can see from the accompanying chart, this is one of the most negative HNNSI readings since immediately after the surprising outcome of the Brexit referendum in the U.K.
So even though the stock market is higher now than where it stood before Election Day, the average market timer is more bearish. Contrarians have therefore become even more bullish than they were before.
The usual qualifications apply, of course: Contrarian analysis 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. My research has found that its greatest explanatory power is measured in days and weeks rather than months or years.
For the moment, however, the Wall of Worry in the wake of Trump’s election means the path of least resistance for the stock market over the near term is up.
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