The stock market is casting a pall on investor morale — but the mood isn’t gloomy enough to start buying – MarketWatch

December 20, 2021 by No Comments

The stock market decline has further to go.

That’s the surprising conclusion reached by a contrarian analysis of market sentiment.

I say “surprising” because the Dow Jones Industrial Average
has shed 1,300 points in less than a week. That normally would darken Wall Street’s mood sufficiently to cause contrarian traders to turn bullish.

But not this time around, at least not yet. Contrarians grade the sentiment of short-term market timers as little better than neutral.

Consider the average recommended equity exposure level among a subset of Nasdaq-focused stock market timers that my firm monitors on a daily basis. (This average is what’s reflected in the Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI.)

Since the Nasdaq
responds especially quickly to changes in investor mood, and because those timers are themselves quick to shift their recommended exposure levels, the HNNSI is my most sensitive barometer of investor sentiment in the U.S. equity market.

This average currently stands at minus 3.6%, which means that the short-term market timers on balance are allocating a small portion of their equity trading portfolio to shorting the market. (Shorting, or short-selling, means betting on a decline.)

While that’s a lot lower than the excessively bullish readings registered several weeks ago, it remains a lot higher than the extremely pessimistic readings that accompanied significant bottoms of recent years.

This is illustrated in the accompanying chart, above. The shaded region at the bottom indicates the range of HNNSI readings that fall in the lowest 10% of its historical distribution. This is the range that in past columns I have used to indicate excessive pessimism. Notice that the latest HNNSI value remains well above that bottom decile. In fact, its latest reading is higher than 27.8% of all daily readings since 2000.

Contrarians won’t be inclined to step up to the plate and buy equities until the HNNSI drops down into the lowest decile, the upper end of which is minus 41.7%. That’s 38 percentage points lower than where it is now.

Ghost of Christmas past

One reason that many bullish traders are stubbornly refusing to throw in the towel is because they have fond memories of what happened around Christmas 2018, three years ago. You may recall that the stock market until then had been plunging, and on Christmas Eve came to the very brink of falling into an official bear market — defined as down at least 20%. But the market stepped back from …….



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