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May 15, 2021, 10:52 a.m. EDT

Why any stock market rally right now will be quick

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By Mark Hulbert

Contrarian investors suspect that the stock market’s recent decline has run its course — for now.

That’s because these market timers, especially those who focus on the Nasdaq /zigman2/quotes/210598364/realtime NDX +0.64% market in particular, have become sufficiently bearish that the short-term path of least resistance has turned up. Still, it’s not clear that any new rally will have much lasting power. An even more serious U.S. market decline cannot be ruled out over the coming couple of months.

For now, the recent decline appears to have been quite modest by historical standards, smaller even than what satisfies the semi-official definition of a correction as a 10% decline. Before Thursday’s big rally, the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.95% had fallen around 1,200 points from its previous all-time high, or 3.4%. The S&P 500 /zigman2/quotes/210599714/realtime SPX +0.58% was 4.0% below its high, and the Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +0.69% was down 7.8%.

Consider how the Nasdaq-focused market timers reacted to these declines. As you can see from the chart below, their average recommended equity exposure (as represented by the Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI) fell to minus 10.7%. That means that the Nasdaq-focused market timers are now recommending that their clients allocate an average of 10.7% of their equity trading portfolios to going short. As recently as April 29, this average exposure level stood at plus 83.6%.

That reflects a remarkably quick rush for the exits — 94.3 percentage points in just 10 trading sessions. In fact, out of the 5,000+ trading days since 2000, there have been only 18 — 0.3% — in which the HNNSI’s decline over the trailing 10 days was greater.

To appreciate the contrarian significance of this, consider that, on average following those past few occasions when the HNNSI declined by this much and this fast, the Nasdaq Composite was 5.3% higher in one month’s time.

Why, then, haven’t the contrarians become more bullish? The answer is also evident in the chart: The HNNSI’s plunge over the past 10 days stopped well short of the excessive bearish zone, defined as being in the bottom 10% of the historical distribution. That zone is represented by the beige-shaded box at the bottom of the chart.

The last time the HNNSI fell into that zone was in March 2020. That was when the market’s “wall of worry” became incredibly strong and was able to support an impressive rally. That wall today is not as strong.

The sentiment picture that the recent data are painting shows the market timers to be trigger-happy. They are quick to jump on the bullish bandwagon when the market rallies, and then jump on the bearish bandwagon when the market declines. As a result, both rallies and declines tend to be short-lived.

A longer-lasting rally will require more extreme bearishness among the market timers, and for them to stubbornly hold onto their bearishness in the wake of the rally’s initial liftoff. Except for that to happen, the market to itself most likely would have to suffer a worse decline than we’ve experienced in recent days. In the meantime, enjoy this rally — while it lasts.

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

Plus: There is a ‘super sale’ in Big Tech and other ‘high-quality’ stocks, says this fund manager

Also read: Wall Street’s ‘Big Lie’: Performance claims that are increasingly straining credulity

US : U.S.: Nasdaq
+91.72 +0.64%
Volume: 506,176
June 24, 2021 5:16p
US : Dow Jones Global
+322.58 +0.95%
Volume: 279.38M
June 24, 2021 5:29p
+24.65 +0.58%
Volume: 1.87B
June 24, 2021 5:29p
US : Nasdaq
+97.98 +0.69%
Volume: 3.93M
June 24, 2021 5:16p

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About Mark Hulbert

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Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD...

Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron’s.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC’s World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What’s Working Now.

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