A contrarian sentiment gauge tracking short-term Nasdaq market timers suggests the S&P 500's rally still has room to run through the midterm election, according to MarketWatch columnist Mark Hulbert. Timers rushed out of stocks during a mild summer pullback rather than staying stubbornly bullish, a pattern Hulbert says typically precedes further gains rather than a market top.
Short-term market timers fled stocks fast during this summer's pullback, and that panic is read as bullish for the S&P 500 through the midterm election. Contrarian analyst Mark Hulbert argues the rush for the exits is the opposite of what shows up at major market tops, when timers typically cling to their positions.
Hulbert bases the call on the Hulbert Nasdaq Newsletter Sentiment Index (HNNSI), which tracks the average recommended equity exposure among short-term Nasdaq-focused timers. The index posted one of its sharpest drops on record since tracking began in 2000 over the final two weeks of July, as the Nasdaq Composite hit summer weakness. Yet the market's pullback itself was only modest.
Since his early July column, the S&P 500 has risen 2.4% through Labor Day. Since his early August column, it has added another 1.6% over the same stretch. A similar-magnitude rise between now and Election Day would not be a surprise, he writes.
Bullish overall, but quick to bail
Hulbert argues timers stay bullish on average, but bail at the first sign of trouble. According to Hulbert: "bullishness is a mile wide but only an inch deep".
Hulbert says a genuine market top requires sentiment that is both wide and deep, a distinction he says many commentators focused only on breadth have missed.
He adds the usual caveats. Sentiment is not the only driver of stock prices, and other factors could still surprise markets. Even if the S&P 500 keeps an upward bias over the next couple of months, Hulbert notes contrarian analysis says nothing about equities' longer-term potential, calling it a short-term indicator at most.
For now, he concludes, sentiment should act as a tailwind for stocks rather than a headwind.
Source: MarketWatch
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