Short-term stock-market timers on balance have yet to throw in the towel on their optimism about the market. This suggests that the market must decline further before a tradable bottom appears. It is surprising that the market timing community has not become more pessimistic. That was perhaps understandable following the failure of smaller banks like Silicon Valley Bank SIVB, -22.87% earlier this week and Signature Bank SBNY, -22.87% . Their failures weren’t an obvious threat to the global financial system, but Credit Suisse’s CS, -19.92% woes are a bigger threat. The broader market average certainly reflects that panic. The Dow Jones Industrial Average DJIA, -1.67% was down more than 2% in midday trading Thursday. Yet about 100 short-term timers appeared on my generation monitor, on balance, barely noticed. Consider their average recommended equity exposure as measured by my firm’s two sentiment indices. First, the Hulbert Stock Newsletter Sentiment Index (HSNSI) reflects the average recommended equity exposure among timers focused on the broader stock market. Second, the Hulbert Nasdaq Newsletter Sentiment Index (HNNSI), reflects the average among timers that focus specifically on the Nasdaq market. As of midday Eastern time on Thursday, the first of these two averages was down 1.9 percent from Wednesday evening. The other fell only slightly more, 6.5 percentage points. That modest decline is hardly the stuff of panic. A similar conclusion is reached when realizing that these sentiment indices did not fall into the lowest 10% of their two-decade distribution. In previous columns I’ve used those lowest deciles to define zones of extreme bearishness—zones that contrarians consider a prerequisite for any decent rally. The HSNSI is currently at the 12th percentile of its distribution since 2000, while the HNNSI is at the 22nd percentile of its distribution. “If the market tries to rally from current sentiment levels, opponents will bet that it will not last long or go much further. ” If history is any guide, the current decline will not bottom out until both of these sentiment indexes are in their bottom deciles and remain there for more than just a day or two. This is what happened last October, when both the HSNSI and HNNSI were at their bottoms for more than 90% of the trading session in the past month. So detractors weren’t surprised by the strength of the subsequent rally, which saw the Nasdaq Composite COMP, -0.86% rise more than 20% on an intraday basis — possibly meeting the semi-official definition of a new bull market. Unfortunately, the current sentiment picture is very different from what was prevalent in October 2022. This is no guarantee that a rally will not occur. But if the market tries to rally from current sentiment levels, opponents are betting that it won’t last long or go much further. Mark Hulbert is a regular contributor to MarketWatch. Their Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com Also Read: Stocks are likely to retrace their 2022 lows, but a failure of SVB or a banking crisis won’t cause it. Plus: If spoiled bank stocks seem attractive now, these buying tips can help you cash in
