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March 5, 2021, 5:52 p.m. EST

After an unseemly stampede, the Nasdaq Composite may be near the end of its correction

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By Mark Hulbert

Stock-market timers, who as recently as two weeks ago were irrationally exuberant, have reacted to the market’s recent correction by beating a hasty retreat.

This is a positive sign, from a contrarian point of view. Though short-term market-timers aren’t yet so pessimistic as to be in the “excessively bearish” category, they are getting close.

Consider how quickly the Nasdaq-focused stock-market timers that my firm monitors have jumped on the bearish bandwagon. As recently as Feb. 12, their average recommended exposure level stood at 88.9%, which was higher than 97.9% of all daily readings since 2000.

Read: Investors may have a ‘buy’ signal, as these big tech stocks have dropped up to 32% in only three weeks

Today, in contrast, their average exposure level is at minus 10.0%, which is at the 24.7 percentile of the historical distribution. (This average exposure level is what is reported by the Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI.)

In only three weeks’ time, in other words, the average Nasdaq-focused stock-market timer has reduced his recommended equity exposure level by 108 percentage points. Far from being an orderly retreat, that’s an unseemly stampede.

As you can see from the accompanying chart of the HNNSI, this rush to jump on the bearish bandwagon is reminiscent of what happened twice last fall, once in September and a second time in October.

In the first of those occasions, the Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP +0.76% fell 11.8% and the HNNSI dropped 74 percentage points before the market resumed its march upwards. In the second, the Nasdaq fell 8.1% and the HNNSI dropped 98 percentage points before the market turned back up.

So far this time around, the Nasdaq has fallen 9.7% and the HNNSI dropped 108 percentage points. If the current correction and the market-timers’ reaction play itself out in the same way as before, we could be close to the end of that correction.

How will we know when the final top of the bull market is at hand, whenever in the future that will be? The answer, from a contrarian perspective, is that at major tops the market-timers will be far more stubbornly bullish than they have shown themselves to be over the past couple of weeks.

Perhaps the best historical illustration of this came at the top of the internet bubble in March 2000, when the HNNSI actually rose in the wake of the Nasdaq’s initial 10% drop from its bull market high.

Fortunately, that’s not what we’re seeing now.

Bonds and gold

The Nasdaq stock market is just one of four arenas in which I track market-timers’ average exposure levels. The others are the general stock market, gold and bonds. Each month in this space I highlight one of them and analyze what it’s saying from a contrarian point of view.

In the meantime, the chart above summarizes where the timers currently stand in all four arenas. Notice the extreme bearishness among both gold and bond-market timers, suggesting from a contrarian point of view that both markets may be close to the beginning of a tradable rally.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com .

/zigman2/quotes/210598365/realtime
US : Nasdaq
13,890.92
+104.66 +0.76%
Volume: 2.33M
April 21, 2021 2:04p
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