Be Cautious When Market Timer Stay Bullish After a Big Downturn
Recent market behavior highlights the importance of sentiment analysis among stock-market timers. By reducing equity exposure and building up cash reserves, timers are signaling a potential short-term boost for the bull markets.
A contrarian analysis reveals a stark shift in market-timer sentiment. In early December, exuberance among timers reached extreme levels, as measured by the Hulbert Stock Newsletter Sentiment Index (HSNSI), which hit a record high of 92.8%. Such a peak often foreshadows markets pullbacks, and the December turbulence was no exception. Since then, the HSNSI has plummeted 63 percentage points to 29.3%, marking a dramatic change in sentiment.
This sharp reduction in equity exposure contrasts with the stubborn bullishness typically seen at major market tops. Historically, during the early stages of bear markets, timers tend to hold onto optimism, often increasing equity exposure despite signs of trouble. For example, during the internet bubble burst in March 2000, market timers became even more bullish after an initial 10% decline—setting the stage for a prolonged downturn.
The current sentiment, however, reflects cautious or even bearish positioning, which contrarians interpret as a healthy sign for the market’s resilience. The absence of unshakable optimism suggests that the bull markets may still have life left.
Sentiment in Other Markets
While stock-market sentiment grabs attention, sentiment in other asset classes also warrants consideration. My firm tracks sentiment indexes for Nasdaq-focused stocks, gold, and U.S. bonds.
Notably, the bond sentiment index has fallen to levels comparable to the HSNSI’s euphoric December peak—but in reverse. This extreme bearishness on bonds suggests the near-term outlook for fixed-income investments may be better than widely assumed.
In summary, it’s wise to remain alert when timers display unyielding optimism after a downturn. History shows that such stubbornness often precedes significant markets declines. Conversely, the current cautious stance among stock-market timers could provide the foundation for further markets stability in the near term.
