Mark Hulbert: Investors now are greedy, and that’s bearish for stocks

This post was originally published on this site

The mood on Wall Street has shifted from fear to greed. And, like clockwork, contrarian-minded investors have shifted their short-term outlook in precisely the opposite direction, from positive to negative.

To appreciate how big a mood shift has taken place, consider where sentiment stood in early August, which was the last time I devoted a column to a contrarian analysis of sentiment. I reported then that stock-market timers were running for the exits, which in turn gave the bull market “a new lease on life.”

Since then, the S&P 500 SPX, +0.53%  has gained close to 3%, taking this U.S. market benchmark to a new bull-market high, surpassing its previous high set in late January.

Today, in contrast, the majority of stock market timers are on the bullish bandwagon, reflecting an underlying enthusiasm if not outright exuberance. That is why contrarians now believe that the market will be heading down.

Opinion: Ray Dalio: Rising debt, income inequality and political polarization are a recipe for a nasty downturn

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.

This average currently stands at 64.9%, having risen in recent sessions to as high as 70.1%. On the occasion of my early-August column on stock market sentiment, in contrast, this average stood at minus 2.7%. This represents a significant shift towards irrational exuberance.

The current stock market mood is more akin to the ‘slope of hope’ the market descends.

Accordingly, instead of the “wall of worry” that prevailed in early August, the current stock market mood is more akin to the “slope of hope” the market descends.

It’s interesting to note that this 70.1% recent reading is almost identical to the HNNSI level that prevailed on the day of the stock market’s late January high, when the HNNSI closed at 70.6%. The Nasdaq Composite COMP, +0.75%   fell almost 10% over the two weeks following its January high, and the S&P 500 lost even more.

To be sure, not every HNNSI reading of 70.1% or above is followed by such a precipitous drop. But more often than not the stock market struggles when the HNNSI is this high, especially in comparison to its performance in the wake of widespread fear.

The usual qualifications apply. Contrarian analysis doesn’t always work, and even when it does it’s only a short-term tool. So market-timer sentiment tells us nothing about the stock market’s likely trend over the intermediate or longer terms. But, to the extent contrarian analysis is right, the stock market over the short-term is likely to head lower.

How short is the short term? In the 1980s and early 1990s, which is how far back my sentiment index data extend, my sentiment indices’ greatest explanatory power was at the three-month horizon. Today, in contrast, as investor reaction time gets quicker and quicker, that horizon is closer to one month.

All of which suggests that the stock market between now and mid-October is likely to be lower than it is today. Plan accordingly.

Related: These 4 called the last financial crisis. Here’s what they see causing the next one

For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com . Create an email alert for Mark Hulbert’s MarketWatch columns here (requires sign-in).

Be Sociable, Share!

Related Posts

 

MarketTamer is not an investment advisor and is not registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory Authority. Further, owners, employees, agents or representatives of MarketTamer are not acting as investment advisors and might not be registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory.


This company makes no representations or warranties concerning the products, practices or procedures of any company or entity mentioned or recommended in this email, and makes no representations or warranties concerning said company or entity’s compliance with applicable laws and regulations, including, but not limited to, regulations promulgated by the SEC or the CFTC. The sender of this email may receive a portion of the proceeds from the sale of any products or services offered by a company or entity mentioned or recommended in this email. The recipient of this email assumes responsibility for conducting its own due diligence on the aforementioned company or entity and assumes full responsibility, and releases the sender from liability, for any purchase or order made from any company or entity mentioned or recommended in this email.


The content on any of MarketTamer websites, products or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options and other securities involves risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities is not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options. The www.MarketTamer.com educational training program and software services are provided to improve financial understanding.


The information presented in this site is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing in our research constitutes legal, accounting or tax advice or individually tailored investment advice. Our research is prepared for general circulation and has been prepared without regard to the individual financial circumstances and objectives of persons who receive or obtain access to it. Our research is based on sources that we believe to be reliable. However, we do not make any representation or warranty, expressed or implied, as to the accuracy of our research, the completeness, or correctness or make any guarantee or other promise as to any results that may be obtained from using our research. To the maximum extent permitted by law, neither we, any of our affiliates, nor any other person, shall have any liability whatsoever to any person for any loss or expense, whether direct, indirect, consequential, incidental or otherwise, arising from or relating in any way to any use of or reliance on our research or the information contained therein. Some discussions contain forward looking statements which are based on current expectations and differences can be expected. All of our research, including the estimates, opinions and information contained therein, reflects our judgment as of the publication or other dissemination date of the research and is subject to change without notice. Further, we expressly disclaim any responsibility to update such research. Investing involves substantial risk. Past performance is not a guarantee of future results, and a loss of original capital may occur. No one receiving or accessing our research should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence, including carefully reviewing any applicable prospectuses, press releases, reports and other public filings of the issuer of any securities being considered. None of the information presented should be construed as an offer to sell or buy any particular security. As always, use your best judgment when investing.