Investors’ Rush for the Exits After Tuesday’s Slide Isn’t How Bull Markets End
Tuesday’s sharp stock-market selloff likely did not signal the end of the bull run — and the behavior of market timers suggests why.
History shows that major market tops are usually marked by complacency, not fear. Investors tend to dismiss declines and treat them as buying opportunities. That wasn’t the case this week.
Short-term market timers reacted swiftly to Tuesday’s drop, slashing equity exposure by nearly 20 percentage points, according to the Hulbert Stock Newsletter Sentiment Index (HSNSI). That ranks among the steepest one-day declines in the index since data collection began in 2000.
This reaction looks nothing like what happened at the peak of the dot-com bubble. After the Nasdaq topped out on March 10, 2000, the index fell more than 10% over the next two weeks. Yet instead of pulling back, the HSNSI actually rose by 2.5 percentage points, showing that investors were still eager to buy the dip.
The contrast is striking. This week’s market drop was far smaller than the one in 2000, yet investors responded with far more caution, not optimism.
From a contrarian standpoint, true market tops tend to form when investors remain convinced that every pullback is an opportunity. Further insight comes from Yale professor Robert Shiller’s “Buy-on-Dips Confidence Index,” which tracks how many retail investors expect the market to rise after sharp declines. Historically, the S&P 500 has delivered weaker returns following periods of high dip-buying confidence than when such confidence is low.
Although Shiller’s index is released with a delay, the sharp fall in the HSNSI suggests dip-buying enthusiasm has cooled considerably.
This doesn’t mean risks have disappeared. Valuations remain stretched, and the bull market may be in its later innings. But if the market follows historical patterns, the eventual top will be met with denial and complacency — not the kind of fear-driven retreat seen after Tuesday’s selloff.
Put simply, panic is usually not how bull markets end.