Stock market timers have turned so bearish in recent days that a contrarian buy signal could be close.
The current sentiment situation is at the opposite extreme of what prevailed two months ago, in mid-July. That was when the U.S. stock market was surging to new bull-market highs, and the market timers were bordering on irrational exuberance. I wrote then that, because the stock market has “no wall of worry left to climb,” it was not a good time “to put more money into stocks.”
Note that contrarian analysis can’t claim to pinpoint the exact day of the bottom, even when it works out. My July column, for example, came a couple of weeks before the day of the bull market high. Those who took the occasion of that column to lighten up on stocks missed out on an additional two percent rise in the S&P 500 SPX.Something similar could happen now, with the stock market continuing to fall for several more days before the correction hits its bottom.
From its highest level in July to its recent low, in fact, the market timers’ average equity exposure level fell 92.9 percentage points. Drops as big as this in as short a period of time are more typical of bull market corrections than the start of a new bear market.
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