Are we in a new bull market for stocks?
By Mark Hulbert
My monthly contrarian update of market timer sentiment
News flash: We may be in a new bull market.
That's the good news. The not-so-good news is that the recent rally may have gotten ahead of itself and a pullback would be health-restoring to the bull market.
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The basis for thinking we may be in a new bull market is the strength of the rally since the October lows. When measured from their intraday lows on Oct. 13, for example, the Nasdaq Composite has risen 21.6%--more than enough to satisfy the semiofficial criterion of a bull market as a gain of at least 20%. The Russell 2000 index has gained even more, 22.3%.
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The reason for believing the market may have gotten ahead of itself is that stock market timers on balance have become extremely bullish--which is a bad omen from a contrarian perspective. This is a big deal because, up until now, the market timer community has reacted to the rally with a considerable degree of skepticism. This meant the bull market had a Wall of Worry it could continue to climb.
This Wall either has disappeared or is in grave danger of crumbling. Consider the average recommended equity exposure level among a subset of short-term market timers who focus on the Nasdaq stock market in particular. (This average is what's tracked by the Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI.) In previous columns I have defined excessive bullishness to exist whenever this average exposure level is in the top 10% of all daily readings since 2000.
The HNNSI entered this highest-decile zone on Thursday, Feb .2, for the first time since November 2021. As you can see from the accompanying chart, the stock market has typically struggled in the immediate wake of readings in this zone of excessive bullishness.
This doesn't necessarily mean that this still-young bull market is over, assuming you even believe it started at the October low. How far the market will fall depends in large part on market timers' reaction. It would be a positive sign if the timers on balance quickly jump off the bullish bandwagon at the first sign of market weakness; in that case, the quickly rebuilt Wall of Worry would give the bull market the opportunity to resume in fairly short order.
In contrast, it would be a bad sign if the timers remain stubbornly bullish in the face of weakness. In that event, the coming pullback would have to last longer and go deeper than otherwise.
The market will tell its story in its own time, needless to say. In the meantime, be on the lookout for a market pullback in coming sessions, and when it does pay close attention to how market timers react.
What about market timers in other arenas?
Read:Market pros are feeling so happy about stocks right now, you have to wonder if they're too bullish
The Nasdaq market is just one of the arenas in which my firm tracks market timers' average exposure levels. Besides the Hulbert Nasdaq Newsletter Sentiment Index, my firm also constructs comparable indexes that focus on the broad U.S. stock market (as represented by the S&P 500 or the Dow Jones Industrial Average ), the gold market, and the U.S. bond market. The chart below summarizes where the timers currently stand in all these arenas.
The existence of sentiment measures for different asset classes allows contrarians to forecast relative returns in addition to absolute returns. For example, based on the relative readings a month ago, I reported that contrarians were projecting that equities would outperform gold. That has been the case since then: In contrast to gold bullion's 3.3% gain over the last month, the S&P 500 has gained 7.3% and the Nasdaq Composite has gained 15.4%.
Based on the readings in the chart below, contrarians expect just the reverse in coming weeks, with gold outperforming equities.
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 reached at firstname.lastname@example.org
(END) Dow Jones Newswires
February 04, 2023 08:26 ET (13:26 GMT)
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