Bull markets tend to peak with a whimper, not a bang - but a 15% correction for the S&P 500 may be next

By Mark Hulbert

In contrast to bear-market bottoms, market tops often are undramatic

S&P 500 is less than 2% below its all-time high, and alarm bells are not ringing yet.

Bull-market tops are not the mirror opposite of bear-market bottoms.

Keep that in mind as you try to discern when the current bull market is about to finally top out. Unlike bear-market bottoms, which typically end with a spasm of despair as traders throw in the towel, bull-market tops are far more gradual and less dramatic. By looking for the mirror opposite of a bear market, investors therefore may remain invested far beyond what turns out to be the final top.

The accompanying charts present the historical data. The first chart, above, focuses on the S&P 500's SPX behavior over the 50 trading days prior to bull-market tops and bear-market bottoms. The chart focuses on major market turning points since 2000 in the calendar maintained by Ned Davis Research. As you can see, the S&P 500 on average drops precipitously over the 50 trading days prior to bottoms - but is largely flat over the comparable period prior to market tops.

This crucial difference is reflected in market-timer sentiment, as is illustrated in the second chart, below. On average over the 50 trading days prior to market bottoms, short-term market timers reduce their recommended equity exposure by 20 percentage points. Over the 50 trading days prior to market tops, in contrast, the average short-term market timer increases his recommended exposure level by less than four percentage points.

This sentiment pattern at market tops suggests that the dominant emotion leading up to market tops is exhaustion and even indifference. There is no mirror opposite of the throwing in the towel that typically accompanies market bottoms - no obvious sign that the market is topping out. Instead, many traders simply become unenthusiastic.

This discussion helps put the stock market's recent turmoil into perspective. The Dow Jones Industrial Average DJIA and Nasdaq Composite Index COMP are each approximately 4% below their all-time highs, while the S&P 500 is less than 2% below its all-time high. None of those losses is large enough to trigger any alarm bells, and the VIX VIX - the CBOE's Volatility Index, aka investor fear index - remains below average.

Though this recent behavior is consistent with what was seen prior to prior bull-market tops, this does not mean that a top is imminent. My point is that you can't conclude from recent market action and market-timer sentiment that a top is not imminent. You will have to look elsewhere for signs of an imminent top.

Identifying those signs is beyond the scope of this column. Hayes Martin, president of the advisory firm Market Extremes, is one of the most careful market historians I turn to for insight - and when an email from him arrives in my inbox, I pay attention. (For the record, his advisory service does not contract with my auditing firm to calculate his service's performance.)

Martin focuses on significant divergences in the market to gauge the likelihood of an imminent market turning point, though the particular divergences he considers most significant is proprietary. In an email earlier this week, he wrote that, based on recent divergences, he believes a sharp correction in the 10%-15% range is imminent for the S&P 500 - and potentially even more for the Nasdaq and smaller-cap stocks.

Fortunately for the bulls, however, he does not believe that this correction will spell the end of the bull market.

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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10-20-26 1645ET