The beginning of the end of the stock market correction could be near

The end of the US stock market correction seems much closer. That is the conclusion of a contrarian analysis of market timer sentiment. It is encouraging, from a contrarian perspective, that the market timekeeping community in recent days has become extremely bearish, as bearish, in fact, as it has been on previous market lows.

It will be crucial in the coming days that the timekeepers remain this bearish on any market rally. If so, wait for a contrarian buy signal. Stubborn pessimism has been largely absent to this point, as I noted a month ago. That’s when I concluded my contradictory analysis of market timer sentiment by stating that because “the pessimism peak has not been reached,” US stocks “will most likely retest their early March low and perhaps don’t even pass that test.”

The S&P 500SPX,
it is currently trading 12% below where it was when that column was published. The Nasdaq Composite COMP,
it is almost 17% lower.

I focused my column a month ago on the failure of the two stock sentiment indices my company maintains to not only fall into their respective extreme pessimism zones (the bottom 10% of their historical distributions) but to stay there for more than a year. day. or two These two indices, the Hulbert Stock Newsletter Sentiment Index (HSNSI) and the Hulbert Nasdaq Newsletter Sentiment Index (HNNSI), reflect the recommended average level of exposure to equities among a particular subset of short-term stock market timers.

One way to quantify their failure is to measure how long both indices remain in the lower deciles of their distributions. For the month before my mid-April column, it was zero. It currently stands at 33%. Although that is a significant increase in pessimism, it is still below the levels to which this percentage rose due to previous bottoms of the market, as you can see in the table below.

market background

% of trading days during the previous month in which both the HSNSI and the HNNSI are in the lower deciles of their historical distributions

March 2020


december 2018


february 2016


March 2009


March 2003


Orderly Crashes vs. Panics

Anyone can guess what it will take this time to reach levels associated with bear market lows. Contrarians tend to avoid even attempting such projections, preferring to let sentiment data tell the story in real time.

However, it is worth noting that, as a general rule, panic selling leads to extreme pessimism more quickly than orderly selling. And, for the most part, the market decline in recent weeks has been closer to the “orderly sell off” end of the spectrum. If this situation continues, it is likely to take more time before the stubbornly sustained extreme pessimism that is normally found at market lows appears.

This is illustrated by the tepid rises in recent days in the CBOE VIX Volatility Index,
Even though the S&P 500 is on the brink of a semi-official bear market and the Nasdaq Composite is at an 18-month low, the VIX remains well below levels seen at previous lows. Currently below 35.0, the VIX is barely half of what it was at the bottom of March 2020, for example. It is even below where it was at the short-term bottom in March of this year. The VIX is not painting a picture of panic selling.

The bottom line? A strong “wall of concern” is building, which in turn should allow the market to stage a significant rally. When this rally starts depends on when the construction of this wall is completed.

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 contacted at

Plus: The S&P 500 is on the verge of a bear market. Here is the threshold.

Also read: This Wall Street legend has lived through every bear market since the 1950s. He says the next one could hit the S&P 500 with a 30% loss.

Add Comment