Market timers in the stock market are more bullish today than at almost any other time this century.
That bodes ill for the stock market over the next few weeks.
Consider the average recommended stock market exposure level among a subset of several dozen stock market timers that my firm monitors daily. (This average is what’s reported as the Hulbert Stock Newsletter Sentiment Index, or HSNSI.)
This average stands at 67.8%, which is higher than 96.6% of all other daily readings since 2000. As I have pointed out in many columns over the past year, the stock market typically struggles in the wake of any HSNSI reading in the top 10% of the historical distribution.
This is illustrated by the data in the accompanying table, which reflects performance since 2000. Notice that there is a 3.77 percentage point difference, on average, between the S&P 500’s three-month returns following highest and lowest decile HSNSI readings.
The data in this table reflect averages over a 20-year period. How did contrarian analysis do in 2020? The answer is imbedded in the accompanying chart of the Dow Jones Industrial Average over the past year. The chart notes each of the occasions in which I reported a contrarian forecast based on stock market timer sentiment.
The biggest contrarian misstep came in mid-April, when — as you can see — the conclusion of contrarian analysis was that the bear market had not yet hit its final low. Other than that, each of these other 2020 columns on market timer sentiment was at least directionally correct.
Particularly noteworthy were the contrarian forecasts in February and early March that the market’s decline still had further to go, as well as the assessments in mid and late September that the market’s correction did not mark the end of the bull market.
To be sure, this chart reflects just those occasions in which one of my columns focused on stock market timer sentiment. The HSNSI is updated daily, so this summary is not an exhaustive analysis by any means. In general, though, my research has shown that stock market timer sentiment has its greatest explanatory power over the one- to three-month time horizon.
This time horizon is particularly relevant today. As you can see from the chart, it’s been a month now since contrarian analysis turned neutral to bearish on the stock market’s near-term outlook. So the coming weeks represent a crucial test of contrarian analysis.
My firm also tracks market timers’ average exposure levels in gold and bonds. Each month in this space I will be highlighting one of them and analyzing what it’s saying from a contrarian point of view. Two months ago, you may recall, I focused on bond timer sentiment, reporting that contrarians were forecasting no big moves in interest rates in either direction in coming weeks. The Treasury’s 10-year yield
currently stands at 0.93%, versus 0.82% then.
My month-ago column on market timer sentiment focused on gold, when I reported that the contrarian outlook was neutral. Since then the yellow metal has risen about $50 per ounce.
The accompanying chart summarizes where all four of my firm’s sentiment indices currently stand. Notice that the stock market is the arena in which contrarians have a forecast right now (and a bearish one at that). Market timer sentiment in the gold and bond arenas is squarely in the middle of the historical distribution, which means that contrarians are neutral in both cases.
