US stocks are very likely to retest their low from early March and maybe even fail that test.
This sobering perspective stems from a contrarian analysis of stock market sentiment. Currently, the “wall of concern” that markets scale is too weak to support a rally.
This is not the narrative on Wall Street, telling investors that the market is experiencing a “peak bear.” That would be a good sign, according to the contrary analysis.
I don’t buy it. A more accurate description of what we’re seeing is a “peak” on bearish peak detection. That has very different contrary implications, as the eagerness to believe that the worst is behind us is a hallmark of the “slope of hope” that market corrections descend.
It’s a good bet that at the tail end of the current market correction, far fewer on Wall Street will insist that we have seen a maximum downtrend.
It’s not that you can’t find pockets of extreme pessimism. But the overall picture is much less pessimistic. On those occasions when one indicator suggests extreme pessimism, others are not.
A good illustration of this episodic and inconsistent pessimism is provided by the two stock market sentiment indices my firm maintains: the Hulbert Stock Bulletin Sentiment Index (HSNSI) and the Hulbert Nasdaq Bulletin Sentiment Index (HNNSI). ). Each reflects the recommended average level of exposure to equities among a particular subset of short-term stock market timers, and while they are generally significantly correlated, there are times when the two diverge.
Last month was one of those occasions. There has not been a trading session since March 15 in which both the HSNSI and HNNI were in the bottom 10% of their respective historical distributions. It’s been three weeks since either was in their bottom decile. This is not a bearish peak picture.
To read what other measures of sentiment say, I reached out to Hayes Martin, president of the advisory firm. Market extremes. Martin’s predictions of market turning points have been impressive. (For the record: Martin does not have an investment newsletter; my newsletter tracking company does not audit his investment performance.)
In an email, Martin said his review of numerous sentiment indicators tells him “the deep-seated pessimism seen in significant funds is clearly missing.” The downtrend pockets that appear from time to time are “selective and transitory”. We are “significantly below the maximum bearish narrative.”
What does the bearish peak look like?
To paint a picture of what the bearish peak looks like, consider the bear market bottom in March 2020. As I noted in a column three weeks agoOn the day of that low, both of my company’s sentiment indices had been in the bottom deciles of their historical distributions for eight of the previous nine trading sessions. At the low of March 2009, these two sentiment indices had been in their bottom deciles for 17 consecutive trading sessions.
The chart above shows the HSNSI in its current form. Short-term market timers who focus on the broad stock market recommend that their clients allocate 23.3% of their trading portfolios to buying stocks. That’s on the 28the percentile of its historical distribution, well above the bottom decile that I have defined in previous columns as the extreme downtrend zone. My firm’s other stock market sentiment indicator, the HNNSI, paints a similar picture; although it is not shown in the attached graph, it is in the 29the percentile of its distribution.
Assuming the stock market follows the opposite script, the bottom won’t hit until sentiment indicators paint a picture of extreme pessimism, and stay there for several days at least.
So be careful not to jump the gun. His enthusiasm to do so is further proof that the bottom has not yet been reached.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be contacted at email@example.com