You are using an older browser version. Please use a supported version for the best MSN experience.

Opinion: Why the stock market might soon careen down a dangerous 'slope of hope'

MarketWatch logo MarketWatch 2/19/2019 Mark Hulbert
a close up of a map

Sentiment conditions on Wall Street are flashing short-term danger signs.

That’s because the mood has shifted from the extreme pessimism that prevailed in late December to nearly as extreme optimism today. Some call current conditions a “slope of hope.”

Consider the average recommended equity exposure among the Nasdaq-oriented market timers I monitor (as measured by the Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI). In late December, this average was lower — at minus 72.2% — than at almost any other time since I began collecting data in 2000.

That’s why contrarians, in late December, were forecasting a powerful rally.

Read: Should stock-market investors freak out over an ‘earnings recession’? These charts say no

Today, in contrast, in the wake of a 17%-plus gain in the S&P 500 (SPX) and a 20%-plus rally in the Nasdaq (COMP) the HNNSI has risen to plus 73%. That’s higher than 90% of all comparable readings since 2000.

In other words, as you can see from the accompanying chart, in six weeks’ time this group of short-term stock-market timers has increased their average equity exposure by more than 140 percentage points: Away from being aggressively bearish (recommending that clients allocate three-fourths of their trading portfolios to short-selling) to being almost as aggressively bullish (now recommending that three-fourths of clients’ portfolios be long).

To be sure, this does not mean that a decline back to the December lows is imminent. Nevertheless, contrarian analysts are convinced that the sentiment winds are no longer blowing in the direction of higher prices.

The usual qualifications apply, of course. Contrarian analysis doesn’t always work. And, even when it does, the market doesn’t always immediately respond to the contrarian signals. This past summer, for example, as you can see from the chart, the HNNSI hit its high about six weeks prior to the market’s. That’s a longer lead time than usual, but not unprecedented. But when the market finally did succumb to the extreme optimism, the Nasdaq fell by more than 20%.

Another qualification about the HNNSI as a contrarian indicator: It works only as a very short-term timing indicator, providing insight about the market’s trend over perhaps the next few months at most. So it’s not inconsistent with the contrarian analysis of current market sentiment that the stock market could be headed to major new all-time market highs later this year.

What contrarians are saying, however, is that even if the market does hit new highs later this year, there may be lower prices first.

Plan accordingly.

Related video: Charts show steady investor optimism, more upside for stocks, Cramer says (provided by CNBC)

UP NEXT
UP NEXT

Mark Hulbert has been tracking the advice of more than 160 financial newsletters since 1980. For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com.

AdChoices
AdChoices
AdChoices

More From MarketWatch

image beaconimage beaconimage beacon