Exhausted Market Timers Signal a Stock Rally

Beware When Market Timers Stay Bullish After a Sharp Downturn

Recent shifts in market sentiment underscore a critical lesson for investors: sustained bullishness after a market downturn can be a red flag.

In early December, stock-market timers exhibited extraordinary optimism, with the Hulbert Stock Newsletter Sentiment Index (HSNSI) reaching a record high of 92.8%—the highest since the index was created in 2000. Such exuberance often signals that a market pullback is imminent, and December’s turbulence quickly followed.

Since then, the HSNSI has dropped sharply, falling 63 percentage points to 29.3%. This decline in equity exposure reflects a marked shift in sentiment. Historically, if a bull market had truly ended, market timers would have shown far less caution—or might have even increased their bullish bets. At the start of past bear markets, timers have often clung stubbornly to optimism, a pattern that was evident during the bursting of the internet bubble in March 2000. After an initial 10% decline from the market high, short-term timers became even more bullish, with disastrous results.

Contrarian analysis views today’s cautious sentiment as a positive sign. The lack of persistent bullishness suggests that the bull market may still have room to run.

Broader Sentiment Signals

Beyond equities, sentiment in other markets offers additional insights. My firm tracks sentiment for Nasdaq-focused stocks, gold, and U.S. bonds, in addition to the HSNSI.

The bond sentiment index currently sits at extremely bearish levels, mirroring the HSNSI’s December exuberance—but in reverse. This suggests that bonds may have stronger near-term potential than Wall Street anticipates.

In conclusion, investors should remain wary when market timers hold stubbornly bullish positions after a significant downturn. Such behavior often precedes deeper declines. In contrast, the current caution among timers might be a foundation for short-term market strength.