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Market timers say it's still too early to jump back into stocks

MarketWatch logo MarketWatch 10/12/2018 Mark Hulbert

CHAPEL HILL, N.C. — Wall Street has not become pessimistic enough for contrarians to become interested in buying.

To be sure, the stock market’s rout this week has certainly gotten Wall Street’s attention. From Oct. 3 through Thursday, a period of just six trading sessions, the Dow Jones Industrial Average (DJIA) fell 6.6% and the S&P 500 (SPX) 6.7%. The last time the final quarter of a year got off to as terrible a start was 2008, and I need not remind you that it came in the middle of the financial crisis—the worst economic downturn since the Great Depression.

Yet stock-market timers currently are not as scared as they were at the bottoms of past stock-market corrections. This suggests that the recent correction has further to go.

Consider the average recommended equity exposure among a subset of short-term market timers who focus on the Nasdaq market 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 in the equity market.

One month ago, the last time I devoted a column to this average, it stood at an exuberant 64.9%, suggesting that “the stock market between [then] and mid-October is likely to be lower than it is today.” As this is written, the S&P 500 is more than 6% lower than where it stood then.

The HNNSI today stands at minus 25.1%. While that is a lot lower than the 64.9% reading of a month ago, it still is significantly higher than the minus 54.9% level to which it fell at the low of this spring’s correction, as this chart shows.

a close up of a map

Contrarians are betting that at the bottom of the market’s current correction, the HNNSI will be lower than where it stands today.

One thing contrarians don’t place any bets on, however, is how much further the correction will go, either in terms of time or magnitude. What they are waiting for, before becoming interested in stepping up to the plate, is extreme pessimism. It could be that the mood on Wall Street descends fairly quickly into thoroughgoing despair, after just another couple of sharp down days. That would turn contrarians positive fairly quickly.

Alternately, contrarians would retain their negative outlook for longer if many of the current bulls remain stubbornly bullish, or other eager-beaver bulls are quick to engage in bottom picking. Either of those behaviors would suggest there is not yet a strong enough so-called Wall of Worry for the bull market to resume its ascent.

There is no need to jump the gun, according to contrarians, since we can instead let the stock market tell its story in real time. And for now that story suggests waiting.

Related video: Beaten-down tech stocks ripe for the picking (provided by CNBC)

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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.

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