Here’s how you’ll know the stock market’s slide is for real By: Mark Hulbert | September 15, 2017
Be wary when the wall of worry crumbles and investors show little fear
The proverbial wall of worry — the one bull markets like to climb — remains as strong as ever on Wall Street.
With both the Dow Jones Industrial Average DJIA, +0.29% and the S&P 500 SPX, +0.18% hitting new all-time highs this past week, sentiment surveys appear to indicate that widespread bullishness has returned and the wall of worry is crumbling.
In truth, investors’ bullishness is a mile wide and an inch deep. As we’ve seen time and again in recent months, bullishness quickly gives way to bearishness at the first sign of trouble. Contrarian-minded investors believe a market top is imminent once this is no longer the case — meaning when investors respond to market weakness by becoming more bullish, not less.
To illustrate how far from that eventuality we currently are, consider the average recommended equity exposure among a subset of stock-market timers I monitor who focus on the Nasdaq COMP, +0.30% in particular (as measured by the Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI). Since the Nasdaq 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.
Notice from the above chart how far the HNNSI plunged in the wake of the market’s turmoil in late July and August. From a high of 88.2% in the last week of July, it reached a low of minus 26.5% in the last week of August — a drop in average recommended equity exposure of 115 percentage points in just one month’s time.
That’s an awfully quick run to the exits. And, in true contrarian fashion, the HNNSI’s low reading in late August created the sentiment foundation for the market’s recent run to new all-time highs.
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