A contrarian reading of stock-market timer sentiment suggests the Nasdaq's summer selloff was not the start of a bear market. Market timers slashed their recommended equity exposure far more sharply than the index itself fell, a pattern contrarians read as bullish rather than bearish.
Stock-market timers rushed for the exits in June and July, and that retreat argues against a market top rather than for one, according to a contrarian analysis from MarketWatch. Stubborn bullishness in the face of weakness is the hallmark of a market peak. This time, the timers did the opposite.
Sentiment fell faster than the index
The Hulbert Nasdaq Newsletter Sentiment Index, which averages the recommended equity exposure of short-term Nasdaq-focused timers, tracked the market's summer drop. From its June 2 high to its July 29 low, the Nasdaq Composite fell 9.8% over that same 40-trading-day stretch.
Over the identical window, the sentiment index dropped 84.4 percentage points. The Nasdaq-100 fell 11.3% over the same period, satisfying the semiofficial threshold for a correction.
A contrast with the dot-com top
That behavior differs from what happened at the peak of the dot-com bubble. After the Nasdaq Composite's first 10% drop from its March 2000 high, market timers actually raised their equity exposure instead of retreating. A broader historical check reinforces the point: since 2000, the recent 84.4-point sentiment drop was more extreme than 79% of comparable 40-trading-day periods in which the Nasdaq Composite fell at least 9.8%.
Because of this contrast, contrarians expect the market to rally back toward its all-time high over the near term. They will then watch how timers react if weakness returns. A repeat rush for the exits would give the bull market another lease on life, while renewed stubborn bullishness would point to a deeper drop ahead.
Source: MarketWatch (Mark Hulbert)
Trading involves risk.
Risk Disclaimer
