A contrarian case for stock-market gains through the midterm election

Mark Hulbert

Yet another lease on life for the bull market

The pace at which market timers exited stocks during moderate weakness this summer suggests the market has not yet topped out.

The bull market has received yet another lease on life.

I say "yet another" because twice in the last two months ago I have concluded one of my columns with a similar message. Since my early July column with this message the S&P 500 SPX has risen 2.4%, and since my early August column on this subject it has risen 1.6%. (Returns calculated through Labor Day.) A similar-magnitude rise between now and Election Day would not be a surprise.

I base this upbeat conclusion on a contrarian analysis of how short-term market timers reacted to the stock market's summer weakness. Though the market's pullback was relatively modest, the average market timer nevertheless ran for the exits in a big way. That's just the opposite of what typically happens at major market tops, when the timers exhibit stubborn bullishness.

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The market timers' unseemly rush for the exits is illustrated in the accompanying chart of the average recommended equity exposure among a subset of short-term market timers who focus on the Nasdaq stock market. (This average is what's reflected in the Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI.)

Notice the HNNSI's big drop in late July, in the wake of the Nasdaq Composite's COMP summer weakness. The drop over the last two weeks of July was one of the sharpest on record since my performance-auditing firm began tracking sentiment in 2000. This indicates that, even though the average market timer, overall, has been quite bullish in recent months, he is quick to get out of stocks at the first sign of trouble. The picture that emerges is of a stock-market-timing community whose bullishness is a mile wide but only an inch deep.

Assuming this bull market follows a contrarian script, a major top won't occur until the timers' bullishness is both wide and deep. This is a crucial distinction because many commentators in effect have been focusing only on the breadth of Wall Street's bullishness, and concluding that a top must be near. The actual sentiment data are painting a more nuanced picture.

The usual qualifications apply, of course. Sentiment is not the only factor that propels the market higher or lower, and any of a number of other factors could easily catch Wall Street by surprise. Furthermore, even if the market turns out to have an upward bias over the next couple of months, contrarian analysis tells us nothing about equities' longer-term potential. It's a short-term indicator at most.

Nonetheless, for the next couple of months at least, sentiment will be a tailwind for the stock market rather than a headwind.

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 mark@hulbertratings.com.

-Mark Hulbert

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09-08-26 1623ET